How J Sainsbury Will Deliver Its Dividend
LONDON -- I'm looking at some of your favorite FTSE 100 companies and examining how each will deliver its dividend. Today, I'm putting supermarket J Sainsbury under the microscope.
A long-term decline in Sainsbury's competitive position came to a head during its financial year ended March 2005. Underlying earnings per share plummeted 62%, and the dividend was slashed in half from 15.6 pence to 7.8 pence.
Despite the cleaving of the dividend, management said, "The dividend cover is still quite low at around 1.2 times and our objective, in the medium term, is to restore it to at least 1.5 times."
"Making Sainsbury's Great Again"
The board implemented a "Making Sainsbury's Great Again" recovery plan, which gained traction. By 2007 the company was reporting a 9.75 pence dividend, covered 1.5 times by EPS, in line with the previously stated objective. Management said, "Going forward we expect dividend cover to range between 1.5 and 1.75 times."
From 2008 to 2011, Sainsbury delivered annual double-digit EPS growth. The dividend grew at a somewhat slower but still healthy pace, which meant that dividend cover increased to 1.75 by 2011. For 2012, Sainsbury lifted the dividend to 16.1 pence, again covered 1.75 times by earnings. It was a milestone: The dividend was back above the level of the pre-cut 2004 payout for the first time. The board announced that it was raising the bar again on dividend cover, saying, "We plan to increase the dividend each year and now intend to build cover to two times over the medium term."
Sainsbury posted underlying EPS up 9.3% to 30.7 pence for the year ended March 2013, but by pegging the dividend at 16.7 pence -- a 3.7% rise -- the board was able to increase cover to 1.83 times.
What can Sainsbury shareholders expect from the dividend going forward? Let's take analysts' dividend forecasts for the next two years and see what underlying EPS Sainsbury would have to bring in if management built cover to two times by the second year. The table below shows my calculations on this basis, as well as historical figures for the last two years.
Underlying EPS (pence)
Dividend per share (pence)
This all looks quite reasonable. EPS growth for the next two years would be within the range seen over the last two. Similarly, my calculations show that if dividend cover were to be increased to two times by fiscal year 2015, we would see annual dividend growth running around the 3.7% delivered last year.
If Sainsbury fell short of 8% annual EPS growth, the directors would still have some room to maneuver with the dividend. Holding cover at 1.83 for the time being and/or reducing dividend growth to, say, the level of inflation (currently around 3%) would be no slight on the dividend policy.
Sainsbury's earnings recovery since its annus horribilis of FY 2005 has been strong enough to support dividend growth comfortably ahead of inflation while, at the same time, significantly increasing dividend cover. That's quite an achievement during economic conditions under which the company's rivals, Tesco and Morrison, have lately been struggling.
Given the momentum in Sainsbury's business, I think shareholders can justifiably hope for annual dividend growth at least in line with inflation -- maybe a point or so higher -- for the next couple of years. Further ahead, there's scope for a bit of a step-up in growth once the target of a twice-covered dividend has been reached -- assuming, of course, that the board doesn't reset the target higher again!
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The article How J Sainsbury Will Deliver Its Dividend originally appeared on Fool.com.Fool contributor G. A. Chester has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.