Investors in Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US) have been forced to face up to a lot of hard realities lately. The recent 7.1% drop in like-for-like sales was a real kick in the teeth. As was the 3.9% drop in market share, gives it just 10.6% of the UK grocery market. The share price is down a dreadful 10% in the last month alone. The whole thing is unreal.
Amid these dismal numbers, one figure stands out. If you’re looking for income, this stock will pay you a whopping 6.81% a year. That is almost 11 times the average savings account, which pays 0.63%, according to Moneyfacts.co.uk. Which begs only one question: is this yield for real?
You don’t want to be piling into a vulnerable but high-yielding stock only for management to admit the dividend is unaffordable, and must be cut. Not only will you lose that juicy yield, but the share price will plummet as well, as embittered investors scramble for the exits.
The New Abnormal
There is certainly nothing normal about Morrisons’ 6.81% yield. As recently as late February, it stood at just 4.91%. The precipitous share price plunge is largely to blame, as is management generosity. It hiked the dividend by 10% in the year to 2 February, taking it to 13p. In May, the board said it was committed to a 5% minimum increase in for 2014/15 to 13.65p, and a progressive and sustainable dividend thereafter.
That pledge was issued in the teeth of a profit warning, from a company suffering from falling margins, a slew of exceptional write-offs and net debt of £2.8 billion (even if management claims this is “in line with expectations”). No wonder analysts are still worried.
It is hard to maintain a generous dividend when you’re losing money. Last year, Morrisons posted a pre-tax loss of £176 million, against £879 million profit the previous year. Its net profit margin was -1.35%. In Q1, that dipped to -5.78%.
Again, management remains outwardly confident, recently stating it was on course for underlying profit before tax of between £325 million and £375 million. Unless that was more of the “bullsh*t” Ken Morrison recently publicly accused chief executive Dalton Philips of speaking.
This Isn’t Kids’ Stuff
Management is banking on a drop in costs, as it completes the costly development phase of its online shopping extravaganza. It has also swallowed the £163 million loss on its failed children’s clothing business Kiddicare, plus various restructuring and IT development costs. It will be hoping that online sales, and receipts from the 100 M Local stores it plans to open every year, will help revive its profits. But it’s hard to protect margins in the middle of a price war, with Aldi and Lidl on your case.
That 6.81% dividend is real for now. Cutting it will only place more pressure on Morrisons’ embattled management, and spark investor flight. But unless the board can turn the ailing supermarket around, it could soon seem like a fantasy.
