Morrisons has just announced results, so how do the UK's big three supermarkets stack up?
It's no secret that I think Tesco (LSE: TSCO) is the UK's best supermarket investment, because of the company's long track record of growing earnings and dividends, and its canny overseas expansion (where it seems to manage to invest in overseas retail chains, such as those in Thailand and Korea, at bargain prices).
But Morrison (Wm.) Supermarkets (LSE: MRW) announced growing profits on Thursday, so how do the two of these compare with the UK's third big supermarket chain, Sainsbury (J) (LSE: SBRY)? Let's see how Morrisons got on first, with its half-year results for the period ending Aug 2. Headlines include...
• Turnover = £7.5b (up 5% on the first half last year)
• Underlying Pre-tax profit = £359m (up 22%)
• Diluted Earnings per share = 11.8p (up 43%)
• Interim dividend per share = 1.08p (up 35%)
That's a pretty impressive performance, based, according to the company, on people flocking to take advantage of its keener prices during the economic downturn. How people will feel when things get better and they're feeling flush again remains to be seen, but chief executive Marc Bolland appeared confident that shoppers will stay with Morrisons.
According to the the TNS Worldpanel grocery sector survey's last update, Morrisons' market share had risen to 11.6% in the 12 weeks to July 12 -- up on its 11.2% share a year ago, which is a 4% increase in customer numbers (and ties in with the reported 5% sales growth).
The big three
It doesn't make much sense to compare Morrisons' 6-month results with full-year results for the others, so I've compared forecasts for the full year to 2010 instead (all ending around the same time, February to March). But I've updated Morrisons' forecasts to take into account the first half results. I've done nothing fancy -- as the consensus before the interim results was for rises of around 12% to 15% for profits and eps, I've just boosted that to 20% in each case, to reflect a conservative take on the interims.
| Company | Morrisons | Tesco | J Sainsbury |
|---|
| Market cap (£b) | 7.5 | 30.3 | 6.2 |
| Pre-tax profit (£m) | 783 | 3194 | 587 |
| Earnings per share (p) | 20 | 29.4 | 22.8 |
| EPS growth (%) | 20 | 18 | 13 |
| Dividend per share (p) | 7.1* | 12.7 | 14.5 |
| Dividend growth (%) | 22* | 6.6 | 9.9 |
| Dividend yield (%) | 2.5 | 3.3 | 4.3 |
| P/E | 14.2 | 13 | 14.7 |
(* Current forecast -- no change by me)
What that shows is that, even if earnings per share grow at 20% for the full year to Feb 2010, Morrisons will still be on a P/E that's higher than Tesco, and on a much lower dividend yield (again allowing for a 20% growth in full-year dividend, against less than 7% dividend growth for Tesco).
So, while the interim results certainly look good for Morrisons, a fair bit of that was already factored into the share price, on the back of full-year forecasts that were already looking pretty good.
Sainsbury is more highly priced than either, but that is supported by its higher dividend, at over 4%. (All three have their dividends and their interest payments well covered, so I see little chance of any dividend growth being curtailed this year.)
Which is best?
We need to wait for updated forecasts for Morrisons to see what the analysts out there think of the full year prospects now, and they may well come up with more attractive figures than my, admittedly crude, attempt (they have, at the very least, more fingers to stick in the air). But for now, Morrisons, despite its upbeat interim report, looks like the least best value to me. Both Sainsbury and Tesco look like better bargains at the moment (with Sainsbury's higher valuation looking fair in relation to its better dividend).
But I still reckon Tesco is the best bet for investors, for the reasons that I opened with.
More from Alan Oscroft:
• Small Retail Picks
• Mobile Merger Mania
• The Rule Shaker Revisited
