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Should I Invest in J Sainsbury plc (SBRY)?

J Sainsbury plc (LON:SBRY)LONDON — To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities, and today I’m looking at J Sainsbury plc (LON:SBRY), the U.K. supermarket chain.

With the shares at 380 pence, J Sainsbury plc (LON:SBRY)’s market cap is 7,200 million pounds.

This table summarizes the firm’s recent financial record:

Year to March 2009 2010 2011 2012 2013
Revenue (million pounds) 18,911 19,964 21,102 22,294 23,303
Net cash from operations (million pounds) 918 1,006 854 1,067 981
Adjusted earnings per share (pence) 21.2 23.9 26.5 28.1 30.7
Dividend per share (pence) 13.2 14.2 15.1 16.1 16.7

Once again, J Sainsbury plc (LON:SBRY) has posted a decent set of full-year results, demonstrating its ability to grow steadily in a competitive market. During the last financial year, the firm opened 14 new supermarkets, extended eight more, and opened 87 more of its briskly growing smaller-format convenience stores.

But traditional food retailing isn’t the company’s only angle of attack. Around 4.3% of sales came from non-food general merchandise, which is an area of business growing at twice the rate of its grocery offering, according to the directors. There’s also an encouraging 4.3% sales contribution from the company’s online operation, and a fledgling banking business that J Sainsbury plc (LON:SBRY) has just taken full control over from its ex-partner Lloyds.

Steady growth is what we’ve come to expect from J Sainsbury plc (LON:SBRY) in recent years, and that makes me optimistic about the company’s total-return potential.

Sainsbury’s total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:

Dividend cover: Adjusted earnings covered the last dividend around 1.8 times. 3/5

Borrowings: Net gearing about 40% with net debt around 2.5 times operating profit. 3/5

Growth: Steadily growing revenue and earnings with robust cash flow support. 5/5

Price to earnings: Around 11 looking forward, and up with growth and yield forecasts. 3/5

Outlook: Good recent trading and a positive outlook. 5/5

Overall, I score J Sainsbury plc (LON:SBRY) 19 out of 25, which encourages me to believe the firm has potential to outpace the wider market’s total return going forward.

Foolish summary
With under-control debt, strong cash flow, steady growth and a positive outlook, Sainbury scores well on the quality indicators and that reflects in the valuation. I’m watching for an opportunity to buy the shares on weakness.

The article Should I Invest in J. Sainsbury? originally appeared on Fool.com and is written by Kevin Godbold.

Kevin Godbold does not own shares in J. Sainsbury. The Motley Fool has no position in any of the stocks mentioned.

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