The Sainsbury’s (LSE:SBRY) share price has strengthened considerably in 2023. Yet despite this ascent (the supermarket is one of the FTSE 100’s top 10 risers in the year to date) its dividend yields still beat the blue-chip average based on current forecasts.
For this financial year (to March 2024) Sainbury’s shares carry a 4.3% dividend yield. This is far above the FTSE index average of 3.7%.
And things get even better for financial 2025. For then the grocer’s yield marches to 4.4%.
But how realistic are current dividend forecasts? And should I buy the blue-chip retailer for my UK shares portfolio?
Flimsy forecasts
In the last financial year Sainsbury’s kept the total dividend locked at 13.1p per share. This reflected a 62% drop in pre-tax profits as higher costs crushed margins.
City analysts expect the full-year dividend to reverse again in the current financial period, to 12.3p per share as earnings decline once more. But they reckon shareholder payouts will recover to 12.8p in financial 2025 as the company returns to growth.
However, these dividend predictions look a little fragile in my opinion. First of all, anticipated rewards are covered between 1.6 times and 1.7 times for the next two financial years.
Dividend coverage of below 2 times is considered weak for cyclical shares.
A debt-heavy balance sheet could also limit the dividends Sainsbury’s is able to pay over the short-to-medium term. Net debt fell last year but still remained at a hefty £6.3bn as of March.
Rising competition
Sainsbury’s faces a huge challenge to grow earnings and dividends as competition in the grocery segment heats up.
Britain’s supermarkets are locked in a bloody discounting war to win customers, reducing the profits they make on their huge sales. Things look set to worsen for the FTSE 100 firm too, as Aldi and Lidl rapidly expand and online investment across the industry ratchets up.
At the same time the costs of items like labour continue to soar. Combined, these twin troubles are having a savage impact on retailers’ margins. J Sainsbury’s retail underlying operating margin dropped 41 basis points last year, to 2.99%.
On the plus side, Sainsbury’s has terrific brand power and commands excellent customer loyalty. The latter is is thanks in part to the popularity of the firm’s Nectar rewards scheme. But whether this can be enough to save its bacon remains to be seen.
Tough conditions
The pressure on Sainsbury’s and its rivals to keep slashing prices is especially high as the cost-of-living crisis saps shoppers’ spending power.
Citizens Advice announced this week that it helped a record 94,000 people between January and April with issues like food bank referrals and access to emergency charitable grants. This was up a whopping 178% from 2020 and illustrates the growing strain on households’ budgets.
So I’m not prepared to join in the stampede for Sainsbury’s shares today. I’d rather buy other FTSE 100 shares for dividend income.
