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As a potential income reserve, J Sainsbury (LSE: SBRY) has come back on my radar.
I have long insisted that companies operating in the supermarket sector receive a dividend of at least 5%. That kind of return makes holding the stock worth the risk.
However, J Sainsbury soared at the end of 2023, causing the performance to fall lower. That's why it was off-limits to me until the stock price weakened this year.
Now, with the share price close to 256p, the expected dividend yield for the business year to February 2025 is back above 5%.
Cash flow is king
But supermarket businesses are low-margin, high-turnover operations. Things can easily change when juggling big revenue and cost numbers, and that can lead to lower profits.
We saw tesco got into trouble a few years ago and a similar scenario could happen to Sainsbury's in the future. After all, the sector is fiercely competitive and the rise of discount operators such as Aldi and Lidl seems unstoppable.
However, one advantage that J Sainsbury has is stable cash flow. That's an essential ingredient for any company backing a dividend-paying stock. Cash is needed 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 is the record of cash flow and dividends with the per share figures shown in pence:
| Year until 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 | eleven | 3.3 | 10.6 | 13.1 | 13.1 | 13 | 13.8 |
I like that the cash flow numbers are much larger than the dividend numbers. However, can healthy amounts of cash flow continue?
Invest to grow
Investors seem to be a little unsure about this judging by the recent share price drop. Perhaps the company's strategy update released on April 7, 2024 explains some of the concern.
The directors intend to increase capital spending to generate future growth and “improve profitability for shareholders”. Part of the plan involves opening around 75 new local Sainsbury's stores over the next three years.
Will increased capital spending compete with cash available for dividends? Maybe. But the company expects cash flow to increase as profits grow.
The directors, for their part, declared their commitment to a progressive policy of dividends and share repurchases. They said: “A higher level of capital investment is balanced by a reinforced commitment to strong free cash flow generation and higher returns for shareholders.”
In more detail, the idea is to start increasing dividends from the start of the new trading year at the end of February 2024. On top of that, a £200m share buyback program will be implemented over the next trading year until February 2025. .
I don't see any mention of reducing the dividend before gradually increasing it! Meanwhile, City analysts have forecast an increase in shareholder payouts next year.
Of course, there are uncertainties. But overall, I think J. Sainsbury is worth further investigation by dividend investors.
