Should I Invest in J. Sainsbury?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities, and today I'm looking at J. Sainsbury  (LSE: SBRY  ) , the U.K. supermarket chain.

With the shares at 380 pence, Sainsbury's market cap is 7,200 million pounds.

This table summarizes the firm's recent financial record:

Year to March

2009

2010

2011

2012

2013

Revenue (million pounds)

18,911

19,964

21,102

22,294

23,303

Net cash from operations (million pounds)

918

1,006

854

1,067

981

Adjusted earnings per share (pence)

21.2

23.9

26.5

28.1

30.7

Dividend per share (pence)

13.2

14.2

15.1

16.1

16.7

Once again, Sainsbury has posted a decent set of full-year results, demonstrating its ability to grow steadily in a competitive market. During the last financial year, the firm opened 14 new supermarkets, extended eight more, and opened 87 more of its briskly growing smaller-format convenience stores.

But traditional food retailing isn't the company's only angle of attack. Around 4.3% of sales came from non-food general merchandise, which is an area of business growing at twice the rate of its grocery offering, according to the directors. There's also an encouraging 4.3% sales contribution from the company's online operation, and a fledgling banking business that Sainsbury has just taken full control over from its ex-partner Lloyds.

Steady growth is what we've come to expect from Sainsbury in recent years, and that makes me optimistic about the company's total-return potential.

Sainsbury's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

  1. Dividend cover: Adjusted earnings covered the last dividend around 1.8 times. 3/5
  2. Borrowings: Net gearing about 40% with net debt around 2.5 times operating profit. 3/5
  3. Growth: Steadily growing revenue and earnings with robust cash flow support. 5/5
  4. Price to earnings: Around 11 looking forward, and up with growth and yield forecasts. 3/5
  5. Outlook: Good recent trading and a positive outlook. 5/5

Overall, I score Sainsbury 19 out of 25, which encourages me to believe the firm has potential to outpace the wider market's total return going forward.

Foolish summary
With under-control debt, strong cash flow, steady growth and a positive outlook, Sainbury scores well on the quality indicators and that reflects in the valuation. I'm watching for an opportunity to buy the shares on weakness.

But right now I'm excited about an idea from the Motley Fool's top value investor, who has discovered what he believes is the best income-generating share-play for 2013. He sets out his three-point investing thesis in a report called "The Motley Fool's Top Income Share for 2013", which I recommend you download now. For a limited time, the report is free, so to download it immediately, and discover the identity of this dividend-generating star, click here.

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