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Summer is fast approaching and I’ve been taking stock of my portfolio after an eventful start to the year. This year, the FTSE 100 Index has gained 3.9%, as I write on 6 May, to sit at 8,578 points.
One area I have been considering buying into lately is retail. Discretionary retail stocks such as clothing brands tend to be cyclical as their earnings are heavily tied to the economy and consumer spending.
As a long-term investor, I find it tricky to get comfortable with discretionary retail. It’s hard to differentiate between a cheap stock ready for a big earnings recovery and those that may fade away.
That’s why my focus is on the consumer staples sector, including groceries. These companies tend to provide essential goods and are more insulated from the ups and downs of the economic cycle.
With that in mind, J Sainsbury (LSE: SBRY) is one FTSE 100 stock that I think investors should consider buying.
Increasing grocery sales
Shares in the UK food retailer have been under pressure in 2025. The company’s stock price has fallen 2% so far this year to £2.70 and have managed to gain just 0.8% in the last 12 months.
While that may be a warning sign to some, I think seeing through near-term volatility and buying stable, successful companies is the key to long-term investing success.
Sainsbury’s full-year results were broadly in line with analysts’ expectations. Full-year sales were up 3.1% to £31.6bn with higher grocery volumes providing a boost despite weaker Argos sales.
Free cash flow declined from £0.6bn to £0.5bn as the company’s ongoing cost-cutting exercise was offset by higher levels of investment and the timing of payments to customers and suppliers.
However, it wasn’t all good news for investors. Next year’s guidance reflects relatively muted growth expectations with fierce competition and inflationary pressures keeping margins low.
Strong dividend policy
I like that the stock offers a healthy 4.8% dividend yield. That’s well above the current Footsie average of around 3.5%. This shareholder-friendly policy is reflected in steady dividend payouts of 13.1p in 2024 and 13.6p for the year ending March 2025.
There is also a special dividend and new share buyback scheme, which should deliver £450m back to shareholders.
Valuation
Sainsbury’s shares are trading at a price-to-earnings (P/E) ratio of 15.3 right now. That’s a touch below its major competitor Tesco (16.3), which also has a lower dividend yield of 3.6%.
I am wary of some relative valuations in the space, however, with Sainsbury’s non-food segment lagging in performance slightly and muddying the waters in terms of an apples-to-apples comparison.
Verdict
All in all, I think Sainsbury’s is a FTSE 100 retail stock for investors to consider. I think the company is a reliable dividend payer that has a clear pathway forward to grow grocery sales and increase free cash flow.
The company’s softer guidance for next year does point to some challenges around competition and growth. However, it’s strong shareholder returns should help to soften that blow.
While I don’t have the spare cash to invest right now, it’s one stock that I’ll seriously consider to boost my portfolio’s dividend yield in the near future.
