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Angels vs Devils: Should You Invest In Wm. Morrison Supermarkets plc?

Making stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US), and listening to what the angel and the devil on my shoulders have to say about the company.

Sales keep on sliding

The “sandwich effect” of lower-end retailers, like Aldi, and premium chains, such as Waitrose, on Morrisons’ market share is well documented, with increasing fragmentation in the grocery market eating heavily into the middle ground. But while rival J Sainsbury has successfully implemented a multi-year strategy to combat this, including developing its online presence and improving the quality and reputation of its brands, Morrisons has failed to demonstrate similar guile to turn its business around.

This theme is borne out by the retailer’s interims last week — these showed meagre sales growth, excluding fuel, of 1% during September-November. And on a like-for-like basis sales actually dropped 2.4% during the period.

Online service ready for launch

But Morrisons is making attempts to enter red-hot retail growth areas, and confirmed this month its intention to launch online operations early next year.

The arrangement — made as part of a £200m tie-up with online shopping specialist Ocado — will see the supermarket finally tap into what is clearly the most exciting earnings driver for the UK’s retailers. Tesco reported online sales growth of 13% during February-August, while Sainsbury is reporting increased revenues to the tune of 15% annually here.

Stiff competition ahead

Still, Morrisons’ new venture is in severe danger of being choked off before it even gets started. Indeed, long-standing online trader Sainsbury has announced that it intends to roll-out an improved online service across the country, incorporating “faster and more intuitive product search and browse features,” by the spring. I expect the country’s other leading supermarkets to follow suit.

Furthermore, Morrisons has also been late to the party in reaching the grocery market’s other holy grail — the convenience store segment. Although the company plans to open 100 new smaller stores during this year and next, the rate of floorspace expansion here still lags well behind that of its major industry rivals.

A decent dividend payer

Morrisons is a long-standing stock favourite for those seeking delicious dividends, the firm having punched solid double-digit growth in the annual payout dating back some years now. And the supermarket affirmed its commitment to providing chunky dividends in September by hiking the interim payment 10%, to 3.84p per share.

City analysts expect this to translate to a total dividend of 12.9p for the year ending January 2014, with the payout then predicted to rise to 13.3p in  2015. These projected dividends currently translate to yields of 4.6% and 4.8% respectively, comfortably usurping the 3.2% FTSE 100 forward average.

A devilish stock pick

Still, I believe that the likelihood of future earnings pressure in coming years is likely to send Morrisons’ dividend prospects — not to mention the retailer’s share price — heading lower sooner rather than later. The company has a mountain to climb to get its turnaround strategy on track, and with huge competition in the hot growth areas of online and convenience, I expect the retailer to experience heavy turbulence in coming years.

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> Royston does not own shares in any of the companies mentioned in this article.The Motley Fool has recommended Morrisons and owns shares in Tesco.