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J Sainsbury (LSE: SBRY) shares are down 6% from their 10 September 12-month traded high of £3.01.
This has mainly been due to the market concerns for the sector after the October Budget. This saw a 1.2% increase in employers’ National Insurance, which will hugely increase costs for big retailers such as Sainsbury’s.
The effects of this remain a key risk to the retail sector and Sainsbury’s. Another broader-based surge in the already high cost of living is another.
That said, as reflected in its Q1 results released on 1 July, the firm appears to be coping well.
The Q1 results
Q1 of its fiscal year 2026 saw a 4.7% year-on-year rise in like-for-like sales, excluding fuel. These are sales coming from its existing stores, excluding the impact of new or closed locations.
Perhaps most notably, Q1 was the 30th consecutive quarter of growth in customer numbers. And this is the third consecutive year in which Sainsbury’s has gained overall market share.
In the results document, the firm reiterated its full-year 2026 forecast for retail underlying profit of around £1bn. It was £701m in its full fiscal year 2025.
And it is profit that ultimately drives any firm’s share price and dividends higher over the long term.
Where could the dividend yield go?
Sainsbury’s yield of 4.8% already outstrips the current FTSE 100 average of 3.5%.
However, analysts forecast that it will increase its dividend to 14.1p this year, 15.1p next year, and 15.5p in fiscal year 2027/28.
These would generate respective yields on the current £2.84 share price of 5%, 5.3%, and 5.5%.
Using just the present 4.8% yield on £10,000 of shares in the firm would make £6,145 of dividends after 10 years. On the same basis, this would rise to £32,086 after 30 years.
This is based on the dividends being reinvested back into the stock (‘dividend compounding’).
Adding in the £10,000 initial stake and the total value of the holding would be £42,086 by that point. This would be making £2,020 a year in dividend income by then.
Are the shares cheap right now?
Sainsbury’s 15.3 price-to-earnings ratio is second from bottom of its peer group, which averages 17.5.
These firms comprise Carrefour at 12, Tesco at 16.6, Koninklijke Ahold Delhaize at 18, and Marks and Spencer at 23.4.
So, it is undervalued on this measure.
It is also cheap at a price-to-book ratio of 1 compared to its competitors’ average of 1.9. And it is also a bargain at a 0.2 price-to-sales ratio of 0.2 against the peers’ average of 0.3
A discounted cash flow analysis shows the shares are 16% undervalued at £2.85.
Therefore, their fair value is £3.39.
Will I buy them?
I look for dividend shares that yield 7%+, so this stock is not for me on that basis.
For growth shares, I want at least an underpricing to fair value of 30%, so they are not for me on that criterion either.
That said, for someone at an earlier stage in their investment cycle than me (I am over 50 now) I think the stock is well worth considering for the long term.
It looks to have strong profit growth potential, which should power both its share price and dividends higher over time.
