A Closer Look at J Sainsbury's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of J Sainsbury (SBRY -1.45%) (JSAI.Y -1.60%) and assessing whether the company is an appetizing pick for income investors.

How does J Sainsbury's dividend history stack up?

Source: J Sainsbury company accounts.

The supermarket has a solid track record of increasing dividends, built over a number of years and with growth moving in lockstep with steady earnings progress. Indeed, the firm's ability to defy the implications of the 2008 Lehman Brothers collapse has enabled it to maintain shareholder returns.

Sainsbury's key position within a naturally "defensive" equity sector -- food retailers are generally considered a safer dividend pick by investors to weather wider difficulties in the economy -- is backed up by historically robust payout coverage, albeit below the generally considered security watermark of 2 times earnings.

What are J Sainsbury's dividends expected to do?

Source: Digital Look.

And the City's forecasters anticipate dividends to pick up the pace over the medium term as earnings keep trending higher -- earnings per share is expected to rise 2% and 6% in 2014 and 2015, respectively.

Sainsbury's announced earlier in the week that group sales increased 4.6% in 2012, to 25.6 billion pounds, with like-for-like sales (excluding fuel) jumping 1.8% in the period. This drove underlying pre-tax profit 6.2% higher to 756 million pounds.

Consequently, the company hiked the dividend after earnings per share rose 9.3%, and announced that it is "committed to increasing the dividend year-on-year and continues to plan to build cover to two times over the medium term."

The company also announced yesterday that it was taking total control of Sainsbury's Bank through the 248 million pound purchase of Lloyd's Banking Group's 50% stake. Having delivered five successive years of solid profits growth, this could provide the supermarket's earnings with an extra shot in the arm and boost shareholder returns further.

How do J Sainsbury's dividend prospects rate against the competition?

Source: Digital Look.

The elevated P/E rating of Sainsbury's sector peers is distorted by a handful of constituents, so it is best to compare the firm's figures with U.K. rivals Tesco and Wm. Morrison. The former trades on a forward earnings multiple of 11.2, with a predicted yield of 4.1%, while the latter also changes hands on a P/E readout of 11.2 and boasts a dividend yield forecast of 4.3%.

In comparison, Sainsbury's currently deals on a prospective multiple of 12.6 for 2014, making it a better value pick in respect of the average FTSE 100 dividend forecasts. As well, the company also continues to make earnings progress despite pressure on British consumers' wallets and earnings pressure among its peers, making it less of a risky pick versus Tesco and Morrison, in my opinion.

The supermarket's multiyear drive to develop its brand and focus on quality has enabled it to attract middle-ground customers seeking decent products at reasonable prices, and this should help it to continue driving growth. Sainsbury's market share now stands at 16.8%, the highest for around 10 years. And I expect the company's multiyear store expansion scheme, particularly in the convenience store space, to supplement organic growth and keep dividends heading higher.

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