I’m working my way through the latest annual reports of your favourite FTSE 100 companies, looking for insights into their businesses. Today, it’s the turn of Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US).
Listening to shareholders
I learned from Johanna Waterous, chair of Morrisons’ remuneration committee, that executive bonuses, share awards and base salary increases were canned as a result of the group’s lacklustre business performance during a challenging year for the industry. Waterhouse said: “It demonstrates to shareholders that incentives for executives will only pay out when stretching performance targets have been achieved”.
Furthermore, “in response to shareholders’ feedback”, the committee reviewed and made a number of changes to the company’s remuneration policy, including raising “the shareholding guideline for Executive Directors from 100% to 200% of salary, to be achieved over five years”.
I’m impressed with the way Waterous has better aligned management and shareholder interests.
Vertical integration
Morrisons is different to the UK’s other supermarkets in that to a significant degree the business is ‘vertically integrated’. Half of the fresh food Morrisons sells is sourced and processed through its own facilities — abattoirs, fish processing plants and the like.
Morrisons’ annual report claims its vertical integration is “a true source of competitive advantage which enables us to offer great quality products for great prices”, including “the flexibility to run industry leading promotions to support our profitability”.
I wondered if there was any evidence of a “competitive advantage” in Morrisons’ numbers, so I took a look at the supermarkets’ operating margins.
| 2009 | 2010 | 2011 | 2012 | 2013 | Average | |
|---|---|---|---|---|---|---|
| Morrison | 4.65 | 5.17 | 5.47 | 5.56 | 5.29 | 5.23 |
| Tesco | 4.66 | 5.03 | 4.98 | 4.87 | 5.97 | 5.10 |
| Sainsbury | 3.14 | 2.99 | 3.39 | 3.46 | 3.39 | 3.27 |
Source: Morningstar
For all the talk of Tesco’s dominant market position, economies of scale, squeezing suppliers for the lowest prices and so on, Morrisons’ margins suggest there may be some truth to its claim that its vertical integration is a source of competitive advantage.
That man Neil Woodford
According to Morrisons’ annual report, fund manager Invesco is the supermarket’s largest shareholder, with ownership of 6% of the company. On further investigation, I discovered that most of that 6% stake can be found within the giant funds of Invesco’s veteran manager Neil Woodford.
Woodford recently announced he’d be leaving Invesco next April. Mark Barnett, who’ll be taking over from Woodford, doesn’t appear to hold Morrisons in his current funds — indeed, he seems to have ditched all his shares in the supermarket early this year, or late last year. Will Barnett also sell out of Morrisons when he steps into Woodford’s shoes? Such a big sale could present investors an opportunity to buy on share price weakness.
As things already stand, the out-of-favour supermarket sector is lowly valued by the market and Morrisons is the cheapest of the lot. At a current share price of 280p, the company trades on 11 times forecast earnings and offers a prospective dividend income of 4.6%.
