Safeway's (LSE: SFW) profit recovery continues. Today it issued a solid set of interim numbers. Although earnings are growing at around the 10% level, due to store reformatting, this improvement is only after relatively heavy investment. Shareholders are being asked to be patient and accept a slower rate of dividend growth (5%) in the meantime.
This was the eighth successive quarter that Safeway has grown its like-for-like sales by more than 5%. This has been achieved by increasing customer numbers and their average spend. Overall, sales were 6% higher but profit margins slipped back slightly from 4.8% to 4.7% as price-cutting campaigns continue. However, pre-tax profits rose by 9% to £181m, boosted by a lower tax charge and reduced interest costs.
Safeway is expecting a good Christmas, based upon its recent progress and a belief that more people will spend the holiday season at home this year. I wouldn't bet against it. Profit growth is likely to come solely from increased sales. There seems little scope to increase profit margins at the moment, especially considering that Safeway is employing an extra 5,000 people this year to improve customer service.
It is also hard to see if the increased investment in the new formats is really improving shareholders returns. The fact that dividend growth is just 5% suggests the benefits are marginal. Safeway is retaining almost two-thirds of its profits, and still only managed a small reduction in debt to £1.1b. A mature company like this should be able to pay out much more.
There must be a concern that this increased investment is necessary just to keep pace with the competition. At 330p per share, Safeway's market value is £3.5b. It is valued at about 13 times earnings for the year to March 2002, while offering a dividend yield of 2.9%. Although the price to earnings ratio is ostensibly cheap, I'm inclined to pay a more attention to the yield in this case. There seems little reason to believe that these shares will outperform the overall UK market on a long-term view.
More: Safeway discussion board
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