Why Wm. Morrison Supermarkets plc Should Not Be In Your 2014 ISA

Wm. Morrison Supermarkets plc (LON: MRW) is simply not the best.

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morrisonsWm Morrison (LSE: MRW) (NASDAQOTH: MRWSY.US) might not be the biggest in the business, but it’s doing fine and is a worthwhile candidate for some of your 2014-15 ISA allowance of £11,760, isn’t it?

Well, I don’t think it’s such a great choice. But before I tell you why, let’s have a look at how it’s been performing over the past few years:

Jan EPS Change P/E Dividend Change Yield Cover
2009 17.4p -12% 15.6 5.8p 2.1% 3.0x
2010 20.5p +18% 14.1 8.2p +41% 2.8% 2.5x
2011 23.0p +12% 11.5 9.6p +17% 3.6% 2.4x
2012 25.6p +11% 11.5 10.7p +11% 3.7% 2.4x
2013 27.3p +7% 9.2 11.8p +10% 4.7% 2.3x
2014* 23.6p -13% 10.0 12.8p +8.5% 5.5% 1.8x
2015* 22.3p -6% 10.6 12.3p -3.9% 5.2% 1.8x
2016* 23.0p +3% 10.3 12.8p +4.1% 5.4% 1.8x

* forecast

Now that’s not actually a bad record, with Morrison managing to keep its earnings and dividends growing during the recession, albeit from a smaller revenue base than its bigger rivals.

Weak share performance

With a forward P/E of between 10 and 11 over the next few years and healthy-looking dividend yields, the shares aren’t horribly overpriced. But they haven’t been doing well of late — the price is down around 10% over the past 12 months, while the FTSE 100 has gained 6%. And over five years, things aren’t much better, with almost precisely zero net movement against a 90% gain for the FTSE.

Now, the sector as a whole has been a poor performer, so it’s not all Morrison’s fault — Tesco shares have only managed around 5% over five years, with Sainsbury up a modest 19%.

First half

With the recession ending, Morrison has a couple of weak years of forecast earnings per share (EPS) ahead of it. In fact, at the halfway stage in August, pre-tax profit was down 22%, though EPS had only fallen 2% — though the interim dividend was lifted 10%.

But the Christmas period was poor for the firm, with a like-for-like sales fall of 5.6% giving it the worst festive record of the three.

Weaknesses

That brings me to what I think are Morrison’s biggest weaknesses. Firstly, it’s a follower and not a leader. With its online offering only finally having gone live in January, it’s years behind Tesco — and if Ocado hadn’t come along when it did, it’s anybody’s guess how Morrison would have managed.

Morrison has only recently spotted the potential of local convenience stores — again well behind its rivals — and is only just ramping up the concept.

Finally, what I consider the biggest weakness — I really can’t work out where Morrison fits. Tesco has the “biggest supermarket” slot with a presence in all the best locations, followed by Asda as the other of the big two, while Sainsbury is doing very well in defining the more upmarket segment of the market and making it its own.

And where Morrisons might have once fitted in at the bargain end of the scale, we now have the likes of Lidl and Aldi to compete with.

Go for the best

So, while I think Morrison might actually be a decent investment over the next 20 years, I think ISA cash is better invested in the bigger players in the business that have a better-defined and more defensive target market.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan does not own any shares in Wm Morrison. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.

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