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Sainsbury’s shares look too cheap to me. Here’s why!

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So far, 2022 hasn’t been great for investors in J Sainsbury (LSE: SBRY). In fact, the past five years have produced minimal returns for owners of Sainsbury’s shares. However, in my view, that might well be set to change.

The long slide of Sainsbury’s shares

Sainsbury’s shares are one of the UK’s most widely held and frequently traded FTSE 100 stocks. What’s more, many of its 171,000 employees own stakes through various employee share schemes. Alas, the supermarket’s stock has been something of a dud over the medium and long term.

Here’s how Sainsbury’s shares have performed over seven different timescales. This is based on the current share price of 209.88p, which values this business at £4.9bn.

One day -0.8%
Five days 10.2%
One month 16.2%
Six months -10.2%
2022 YTD -23.9%
One year -25.5%
Five years -9.6%

Sainsbury’s shares have lost more than a quarter of their value over the past 12 months and slid almost a tenth over the past half-decade. Even worse, they have also fallen over the past 10 and 20 years. Yikes. That said, these returns exclude cash dividends, which account for a large proportion of long-term returns from this particular stock.

Sainsbury’s stock looks cheap to me

Of course, I don’t buy shares just because they have crumbled to lower levels. However, I am kicking myself that I missed a chance to buy into the UK’s second-largest supermarket at dirt-cheap levels last month.

At its 52-week high, the Sainsbury’s share price hit 303.6p on 19 January — just over a month before Russia invaded Ukraine, causing a meltdown in global stock markets. At their 52-week low, Sainsbury’s shares briefly touched 168.7p on 7 October. I’d have happily waded deep into this stock at this dirt-cheap level, but I took my eye off the ball.

Even so, as a value and income investor, I think this Footsie stock still looks pretty cheap today. Sainsbury’s price-to-earnings ratio of 8.6 translates into an annual earnings yield of 11.6%. This is over 1.6 times the earnings yield of the wider FTSE 100.

Furthermore, Sainsbury’s shares offer a trailing dividend yield of 5.8% a year, roughly 1.7 percentage points above the FTSE 100’s yearly cash yield of 4.1%. The good news is that this dividend is covered twice by earnings, which suggests to me that it is solid and has room to grow.

Would I buy this cheap stock today?

In the UK’s fiercely competitive grocery market, Sainsbury’s must fight against its larger rival Tesco and privately owned German discounters Aldi and Lidl. Also, soaring inflation, sky-high energy and fuel bills, and rising interest rates have crushed consumer confidence. Now’s not an easy time to be a leading UK retailer, especially with a recession on the horizon.

To sum up, I would indeed buy shares in Sainsbury’s at current price levels, not least for their attractive income stream. However, I won’t for now — purely because my wife and I just invested a hefty sum into six big US stocks whose prices fell this week. But we plan to buy into this FTSE 100 stock at some point in 2022-23!

The post Sainsbury’s shares look too cheap to me. Here’s why! appeared first on The Motley Fool UK.

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.