I’m out looking for shares again. Should I take Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) down the aisle?
Is Morrisons a supermarket?
Last time I checked out Morrisons, dividend supremo Neil Woodford had just bought a major stake in the supermarket chain. He clearly found more reasons to shop at Morrisons, but would I take it to the check-out today?
Back in March, Morrisons traded at a tempting 10.3 times earnings, but I thought its growth prospects look limited, and so it has proved. The share price has since fallen 2p to 266p, a drop of just under 1%. Rival J Sainsbury grew 17% in that time, although Tesco fared worse than both, falling 6%. Like-for-like sales at Morrisons fell 2.4% in the third quarter, thanks to subdued consumer confidence and “heavy promotional activity across the industry”, according to its recent interim management statement.
Inconvenience stores
I have been frustrated by Morrisons’ failure to exploit two rapid-growing markets: smaller convenience stores and the internet. That’s a clear mistake, with the Institute for Grocery Distribution predicting the convenience store market will grow 29% and online grocery sales will double to £11.1 billion by 2017. The good news is that management is now getting its act together. It pilots its fresh food delivery service in Warwickshire at the start of 2014, and expects to serve over 50% of UK homes, including London, by the end of the year. It opened a further 36 ‘M’ local convenience stores during Q3, taking the national total to 69, of which roughly half are in London and the South East, a key growth area for Morrisons. It is on track to have 100 ‘M’ local stores open by the end of the current year, with another hundred to follow in 2014/15.
Times are tough for the supermarkets, as customers continue to struggle with the cost of living. The recent dip in inflation may offer some respite, although rising energy bills will cancel that out. Morrisons lacks overseas diversification. To me, it still doesn’t feel like a chain for London and the South-East, and the last store I went into, in Harwich, was a bit tatty, especially the cafe with its rows of uncleared plastic tables, although the man on the fish counter was charming.
Checking out
In March 2011, management committed to a minimum annual dividend increase of 10% for three years, of which this is the final year. Morrisons currently yields a beefy 4.4%, covered 2.3 times, and its dividend policy is expected to remain progressive. You can buy it at just 9.9 times earnings (similar to Tesco’s 10x valuation but cheaper than Sainsbury’s 13.4x). But growth prospects are poor, with a forecast 9% drop in earnings per share in 2014. Shoppers have yet to feel the benefit from the so-called recovery, and I think that bodes ill for the supermarket sector, including Morrisons.
