morrisonsIn the battle of the supermarkets, Wm. Morrison (LSE: MRW) (NASDAQOTH: MRWSY.US) seems to be just about holding on to last place at the moment — falling way behind the big ones in getting its online shopping offering off the ground, and losing out to the likes of Lidl and Aldi in the deep-discount arena.

And the share price has had a disastrous year, losing 30% over the past 12 months to 180p.

Nice dividends? Wait!

Still, at least the dividends are holding up and there’s a 7% yield on offer this year, eh? Whoa, hold on a moment, let’s look a little closer…

The 13p-per-share dividend paid for the year ended in February 2014 was 10% up on the previous year, and provided a yield of 5.4% — good by any measures, let alone for the supermarket sector. But the profits that backed it were not really there, at least not on a statutory basis — we heard of a pre-tax loss of £176m and a loss per share of 10.2p.

Morrisons did record an underlying pre-tax profit of £785m, but that was down 13% from the previous year, and underlying earnings per share (EPS) dropped 8% to 25.2p. So, on an underlying basis at least, the dividend was covered 1.9 times — which seems adequate for a supermarket.

What cash?

At the same time, the company told us it had a “commitment to 5% minimum increase in dividend for 2014/15 and a progressive and sustainable dividend thereafter“, and spoke of a “return of surplus capital as appropriate“.

But with EPS forecast to crash by 50% to just 12.5p for the coming year, and with a modest recovery to only 14.5p the year after, many of us will see Morrisons as putting its mouth before its money. A 5% rise in the 2015 dividend would take us to 13.65p, which is significantly in excess of that earnings forecast, and that’s not a sustainable strategy.

For a one-off in an otherwise upwards trend from a company that is cash-rich, that wouldn’t worry me at all — but Morrisons is not that company, and now is not the time to be talking big about dividends and surplus capital. Further payments of unsustainable dividends would erode the company’s capital, and it needs that to rebuild itself.

Don’t bank on it

The way things look at the moment, I reckon anyone thinking that Morrisons is a great dividend prospect needs to seriously rethink things. Sure, companies go through tough patches when they need to retrench and get back on a solid footing, and I’m not suggesting that Morrisons won’t be able to do that, but those are not the times to be talking about uncovered dividends and about surplus cash that doesn’t exist.

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Alan does not own shares in Morrison or Tesco. The Motley Fool owns shares in Tesco.