Is Sainsbury's A DRIP Share For The Long Term?

Published in Company Comment on 5 December 2012

J Sainsbury (LSE:SBRY) is one of the UK market's biggest companies. But how have long-term investors fared?

Some of the biggest companies in the FTSE 100 (UKX) run schemes where investors can take dividends in the form of new shares instead of cash. This is known as a Dividend Reinvestment Plan (DRIP), or 'scrip' dividends.

If the company in question pays a large and increasing dividend, such reinvestment can quickly compound the size of your shareholding higher.

Using dividend data on Sainsbury's (LSE: SBRY), you can see how the income produced by this family favourite has made dedicated shareholders richer.

Shares ownedDividendDividend per share (p)Shares purchased by DRIP schemeNew holding
1,0002003 interim4.22161,016
1,0162003 final11.36421,058
1,0582004 interim4.33141,072
1,0722004 final11.3645983*
9832005 interim2.157990
9902005 final5.65191,009
1,0092006 interim2.1561,015
1,0152006 final5.85171,032
1,0322007 interim2.451,037
1,0372007 final7.35121,049
1,0492008 interim371,056
1,0562008 final9321,088
1,0882009 interim3.6111,099
1,0992009 final9.6321,131
1,1312010 interim4131,144
1,1442010 final10.2331,177
1,1772011 interim4.3121,189
1,1892011 final10.8391,228
1,2282012 interim4.5181,246
1,2462012 final11.6451,291

* adjusted for share consolidation

My figures are based on someone that owned 1,000 Sainsbury shares 10 years ago. Here is how dividend reinvestment has rewarded the company's investors.

Just over 10 years ago, shares in Sainsbury's were around 329p each. If an investor bought 1,000 shares and kept on reinvesting the dividends, that shareholding would have grown to 1,291 shares today. So, an outlay of £3,290 in 2002 would now be worth £4,351.

The total return is even better than that. In 2004, Sainsbury's distributed 35p per share to its shareholders. This followed the disposal of its US supermarkets business. This was essentially a 10.6% special dividend to the hypothetical investor that had bought at 329p two years earlier. The shares were then consolidated 7:8.

The disposal of the US operations preceded a disappointing period for dividend reinvestors. The Sainsbury's payout was cut and the share price took off. This meant that the dividend stream was now buying back far fewer shares.

The financial crisis reversed this trend. In one year, the Sainsbury's share price halved. Yet Sainsbury's were rapidly increasing shareholder dividends. The effect was a dramatic ratcheting upward of the number of shares that could be purchased using dividend cash flows.

The Sainsbury's dividend has been increasing year-on-year since 2005. This has been thanks to 31 successive quarters of sales growth at the company. In the last five years, that dividend has been increased at an average of 10.7% a year.

Sainsbury's shares are now expected to yield 4.9% for 2013. This means that a £3,290 investment in 2002 could now yield £213 for the year. Another 6.1% dividend increase is expected for 2014, increasing the compounding effect of the DRIP further.

Sainsbury's perhaps looks more of a buy now than at any point in the last 10 years. The business has real momentum. The dividend yield is high and rising. A forward price-to-earnings ratio of 11.5 is far less than the market average, and two years of growth are forecast.

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> David does not own shares in Sainsbury's.

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DrFfybes 05 Dec 2012 , 3:27pm

I'm confused, why not include the special dividend in the DRIP calculation?

Admittedly it might have to have been done manually, but including it might make the annual return slightly better than the lamentable 2.45% that the headline figures seem to show.

Conversely £3000 maximum invested in the Principality 5 year fixed rate Cash ISA around that time would have given 6% pa, followed by 5 years in a Halifax 5% fix, would have yielded £5124, without the rollercoster of watching your investment double in 2006/7 and then halve again in 2008.

So I think the answer to your headline question is a pretty simple "no".

goodlifer 06 Dec 2012 , 1:12pm

"The rollercoaster of watching your investment double in 2006/7 and then halve again in 2008."

What more could one ask?
Some people seem very hard to please.

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