Does Sainsbury’s share price make the stock a no-brainer?

For me, the main reason to invest in supermarkets is for example J Sainsbury (LSE: SBRY) is a shareholder dividend harvester. Does Sainsbury’s share price near 262p make the stock cheap?

Perhaps. By some measures, current stock levels give the business an unexpected valuation. For example, the expected price-to-earnings multiple is around 13 for the trading year until March 2024. And the anticipated dividend yield for that year is about 4.6%.

Points to consider

However, several factors keep me wary of the company. And the first is that City analysts are predicting a reduction in earnings and dividends for the current year to March 5 and next year. And one thing I like about dividend investing is that the record of revenue, income, cash flow and dividends tends to increase every year. So Sainsbury’s failed the test.

Another factor that keeps me away from savings is that Sainsbury carries a lot of debt. My data provider has a market capitalization of £6.1bn and an enterprise value of £11.27bn. And the difference between the two represents the net debt estimate.

In the past, supermarkets could justify their large debts by demonstrating the steady and defensive nature of their business. Cash is often used to keep playing regardless of the general economic situation. But now, I don’t think it’s an easy situation.

There is a lot of cutthroat competition out there for the big supermarket chains. But Sainsbury’s does not have a financial safety cushion of big profits. The supermarket game is notorious for huge volumes and low profits. And it’s a business model that works well. But there is potential to break down when the market becomes over-supplied. And today’s consumers have many choices about where they can shop.

strong revenue

All of which means Sainsbury’s profits and dividends could be fragile. So, a decline in these two indicators is not welcome and may be a warning sign. But in fairness, Sainsbury posted a decent set of figures in January for revenue.

The firm’s sales performance for the three months to January 7 built on previous results. And that led to a decent revenue result at the point of three quarters of the trading year. However, costs such as increases in staff wages affect profits. But the rate of cost increases may moderate ahead. And the company’s earnings can increase over time.

However, I always have a rule for myself not to invest in any supermarket stock unless it yields a dividend of at least 5%. And because I would have better compensation for the risk of holding the stock at that level.

But avoiding Sainsbury’s now could be a mistake. Stock prices have been on a roll lately. And there is speculation that the company could be a takeover target. For example, in January, the director announced that the Bestway Group had acquired shares representing 3.45% of the company’s shares. But Bestway denied it was considering a bid for the business.

It is possible that other people can pitch to the company, but on balance, Sainsbury’s stock is a no-brainer for me to buy right now.