Are Sainsbury shares a no-brainer buy?

Man shopping in supermarket

At around 222p, the J Sainsbury (LSE: SBRY) share price has dropped back by around 25% over the past year. But the interesting thing for me now is the supermarket chain’s future dividend.

City analysts expect the business to pay shareholders 12.6p per share for the trading year to March 2024. And that puts the forward-looking yield at almost 5.7%.

Solid income?

I reckon that’s attractive because the dividend has been growing a bit over the past few years. And the compound annual growth rate of the shareholder payment is running at about 5%.

Sainsbury’s yield is better than its rival Tesco‘s, which is only about 4%. I don’t have any preference for one company over the other apart from Sainsbury’s lower valuation. So, does that make Sainsbury shares a clear investment opportunity for me?

I’d stop short of calling the opportunity a no-brainer. It’s worth me remembering that all shares carry risks as well as positive potential. And any business can run into operational challenges and setbacks from time to time. It’s important not to leave my brain behind when choosing stocks. And I’ll employ the grey matter to help me do my own research before finally deciding to pull the trigger and buy some of the shares.

Nevertheless, I found July’s first-quarter trading update to be encouraging. It covered the 16 weeks to 25 June and the figures were good. Grocery sales figures were down by 2.4% against last year’s “elevated” Covid-19 levels. But they were up by 8.7% compared to pre-pandemic sales. However, sales from the firm’s Argos division, its general merchandise and its clothing were all down a bit.

In line with expectations

Overall, the company said it’s trading in line with expectations. Meanwhile, City analysts have pencilled in a decline in earnings of almost 8% for the current trading year to March 2023. And they predict a small rebound of nearly 4% the following year.

However, I reckon weaker earnings are one of the reasons the share price has eased back over the past 12 months. And crucially, the dividend remains in place. So, the two conditions are what has created the good value that I think I’m seeing now with Sainsbury.

Times have been challenging in the sector with the pandemic and the current cost-of-living crisis. And on top of that, budget competition from Aldi and Lidl continues to keep the older chains like Sainsbury’s on their toes. But I’ve been encouraged by the way the business, as well as Tesco and others, have found ways to fight back — mainly by better cost control and lowering some selling prices.

My opinion has changed a little about the severity of the threat from the discounting would-be disruptors. I think they may be getting close to having picked all the low-hanging fruit. And now it could be much harder for them to take more market share from the old-guard supermarkets.

I wouldn’t invest in Sainsbury for growth. But I think the business is something of a cash-cow and I’d buy some shares for that dividend yield.

The post Are Sainsbury shares a no-brainer buy? appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.