Can Wm. Morrison Supermarkets plc's (LON: MRW) total return beat the wider market?
To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.
So this series aims to identify appealing FTSE 100 investment opportunities and today I'm looking at Wm. Morrison Supermarkets (LSE: MRW), which operates Britain's fourth largest chain of food supermarkets.
With the shares at 262p, Morrison's market cap. is £6,103 million.
This table summarises the firm's recent financial record:
|Year to January||2008||2009||2010||2011||2012|
|Net cash from operations (£m)||579||790||735||898||928|
|Adjusted earnings per share||19.7p||17.35p||20.5p||23p||25.6p|
|Dividend per share||4.8p||5.8p||8.2p||9.6p||10.7p|
Morrison's share price has slipped back from the highs it achieved towards the end of 2012. Weak winter trading has sharpened fears about the company's late arrival to the increasingly important online and local shopping arenas. The directors have been talking about difficult markets as cash-strapped consumers increasingly turn to discount-driven and promotion-led food shopping. The firm is putting disappointing sales figures down to inefficiency at getting its sales message across, particularly in terms of promotional innovation and communication of points of difference.
Morrison is the UK’s fourth largest food retailer with over 400 stores and its business is mainly food and grocery. One point of potential difference is that most of the fresh food sold is sourced and processed though the company's own manufacturing facilities, giving it close control over provenance and quality, which could help the firm ride out the current galloping horsemeat scandal!
2012 was tough and the directors are expecting 2013 to be similar. That makes me a little nervous about the total-return prospects for Morrison investors.
Morrison's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:
1. Dividend cover: adjusted earnings covered last year's dividend almost 2.5 times. 4/5
2. Borrowings: net gearing is around 42% with net debt about 2.3 times earnings. 3/5
3. Growth: all of revenue, earnings and cash flow have been growing. 5/5
4. Price to earnings: a forward 10 or so looks up with growth and yield forecasts. 2/5
5. Outlook: recent trading slightly down and a cautiously optimistic outlook. 3/5
Overall, I score Morrison 17 out of 25, which makes me inclined to be cautious about the firm's potential to out-pace the wider market's total return, going forward.
Although growth has been good, it looks less certain going forward. There's good dividend cover from earnings, but net debt has been creeping up recently. Recent trading has been weak and the outlook is insufficiently robust to reassure. The valuation looks full compared to growth and yield forecasts. Overall, I'm insufficiently enthused about Morrison to invest right now despite the current forecast dividend yield of around 5%.
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> Kevin does not own shares in Wm. Morrison Supermarkets.