Sainsbury: A FTSE 100 Dividend-Raising Star

LONDON -- In an outcome that's tough on investors, the FTSE 100 has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF, for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Year 2007 2008 2009 2010 2011
Dividend per share (pence) 19.1  20.2 17.1 16.2 18.1

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is J. Sainsbury  (LSE: SBRY.L  ) .

The big question is whether the company's dividend can continue to outperform its index. Let's take a closer look.

Sainsbury runs a chain of UK supermarkets, and with the shares at 355 pence, the market cap is around 6,700 million pounds. This table summarizes its recent financial record:

Year to March 2008 2009 2010 2011 2012
Revenue (million pounds) 17,837 18,911 19,964 21,102 22,294
Net cash from operations (million pounds) 811 918 1,006 854 1,067
Adjusted earnings per share (pence) 19.6 21.2 23.9 26.5 28.1
Dividend per share (pence) 12 13.2 14.2 15.1 16.1

So, the dividend has increased by 34% during the last five years -- equivalent to a 7.6% compound annual growth rate.

The firm has around 1,000 stores, 440 of which are of the smaller convenience format. It takes a workforce of about 150,000 to keep Sainsbury ticking, and, according to my calculator, that averages out to about 150 people for each store, although not all employees will be in-store working. The scale of grocery operations has certainly grown from when I was a nipper and we bought our food from the shop on the corner. In fact, Sainsbury was in the vanguard of the supermarkets' rise to dominance, once claiming the No. 1 spot as the biggest chain in Britain. Now it ranks No. 3, so what happened? Tesco happened, that's what.

Supermarkets battle it out on several fronts, but today's skirmish is in fresh food according to Sainsbury's directors. It's all about how the customers' trust their favorite store brand to deliver fresher food consistently. One angle that the company is pursuing is to source its fresh produce closer to home, from Britain in fact. "This will help develop British farming and protect livelihoods, while reducing food miles and delivering fresh, healthy, nutritious food to the table," they say. That sounds like a good idea to me.

Sainsbury's dividend growth score
I analyse four different features of a company to judge whether its dividend can continue to rise:

  1. Dividend cover: Adjusted earnings covered the last dividend around 1.7 times. 3/5
  2. Net cash or debt: Net gearing of 35% with debt around two-and-a-half times earnings. 3/5
  3. Cash flow: Cash flow supports earnings and both are trending up. 5/5
  4. Outlook and recent trading: Good recent trading and a cautiously positive outlook. 4/5

Overall, I score Sainsbury 15 out of 20, which encourages me to believe the firm's dividend can continue to outpace dividends from the FTSE 100.

Foolish summary
There's a fair bit of debt, and dividend cover is a little lean, but supermarkets tend to have strong and consistent cash flows to support such a position. The positive outlook is encouraging.

Right now, the forecast full-year dividend for 2014 is 17.6 pence per share, which supports a possible income of around 5%. That looks attractive to me.

Sainsbury is one of several dividend outperformers on the London stock exchange. There's one man who's as keen as I am to find, and invest, in them. I suggest you read all about his best investment ideas now in this free, limited-time report, while you have the chance: "8 Income Plays Held by Britain's Super Investor." This free report analyses the 20 billion pound portfolio of legendary high-yield expert Neil Woodford. Click here now to discover his favorite dividend opportunities with good growth potential.

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Further investment opportunities:

Kevin Godbold does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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