As a potential income stock, J Sainsbury (LSE: SBRY) has dropped onto my radar again.
For a long time, I’ve insisted on a dividend yielding at least 5% from companies operating in the supermarket sector. That kind of return makes the risk of holding the shares worthwhile.
However, J Sainsbury shot up at the end of 2023, causing the yield to drop lower. So it was off limits for me until weakness in the share price this year.
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Now, with the share price near 256p, the forward-looking dividend yield for the trading year to February 2025 is above 5% again.
Cash flow is king
But supermarket businesses are low margin, high turnover operations. Things can shift easily when juggling the big numbers of revenue and costs, and that can lead to lower profits.
We saw Tesco get into trouble a few years back and a similar scenario could happen with Sainsbury’s in the future. After all, the sector is fiercely competitive, and the rise of discounting operators like Aldi and Lidl seems unstoppable.
However, one advantage J Sainsbury does have is stable cash flow. That’s an essential ingredient for any business backing a dividend-paying stock. It takes cash to pay dividends and the supermarket sector is known for its defensive characteristics. In other words, supermarket businesses are less cyclical than many others.
Here’s the cash flow and dividend record with the per-share figures shown in pence:
| Year to February | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024(e) | 2025(e) |
| Operating cash flow per share | 56.2 | 42.3 | 55.5 | 106 | 42.9 | 92.9 | ? | ? |
| Dividend per share | 10.2 | 11 | 3.3 | 10.6 | 13.1 | 13.1 | 13 | 13.8 |
I like the cash flow numbers being much larger than the dividend figures. However, can healthy amounts of cash flow continue?
Investing for growth
Investors appear to be a little uncertain about that judging by the recent drop in the share price. Perhaps the company’s strategy update released on 7 April 2024 explains some of the concern.
The directors intend to increase capital expenditure in order to build future growth and “enhance returns for shareholders”. Part of the plan involves opening around 75 new Sainsbury’s local convenience stores over the next three years.
Will increased capital expenditure compete with the cash available for dividends? Maybe. But the company expects cash flow to increase as profits grow.
The directors, meanwhile, declared their commitment to a progressive dividend and share buyback policy. They said: “a higher level of capital investment is balanced with a reinforced commitment to strong free cash flow generation and stronger returns for shareholders”.
In further detail, the idea is to begin increasing dividends from the start of the new trading year at the end of February 2024. On top of that, a £200m share buyback programme will unfold over the course of the next trading year to February 2025.
There’s no mention I can see of rebasing the dividend lower before raising it incrementally! Meanwhile, City analysts have pencilled in an uptick in the shareholder payment for the coming year.
There are uncertainties, of course. But on balance, I see J Sainsbury as worth dividend investors’ further research time now.
