Investors are once again dumping UK supermarkets today after the sector’s largest player, Tesco ,warned on profits for the fourth time this year and revealed that it had overstated first-half profit by £250m.
These revelations have hit Tesco’s shares hard. However, investors have also sold the shares of Morrisons (LSE: MRW) and Sainsbury’s (LSE: SBRY) off the back of this news, for no apparent reason.
Unaffected
Tesco’s woes are limited to the company, accounting issues aren’t usually contagious and the company has been without a finance director for some time now. Morrisons and Sainsbury’s are unlikely to be affected by this issue but this hasn’t stopped investors from jumping ship.
What’s more, both Morrisons and Sainsbury’s appear to be a better position than their larger peer. For example, in comparison to Tesco’s recent dividend cut, Morrisons and Sainsbury’s have stated that they are committed to their lofty payouts.
At present levels, Sainsbury’s supports a dividend yield of 6.1%, covered nearly twice by earrings per share. Morrisons’ shares offer a yield of 7.1%, an extremely attractive payout and one that’s been underwritten by management.
Indeed, management has stated that the group will generate £2bn of cash and £1bn of cost savings over the next three years. Around half of this cash will come from the sale of property. City analysts have run the numbers and agree with management. Analysts believe that the company’s payout, which costs around £300m per annum, will be covered by cash generation, even if the grocer misses profit forecasts.
Tough times
Still, despite attractive dividend yields, Sainsbury’s and Morrisons are going through rough times. During the quarter to June, Sainsbury’s retail sales were up just 1% excluding fuel, down 0.3% including fuel. Like-for-like sales were up 1.1% ex fuel and down 2.4% inc fuel.
Nevertheless, the group continues to think up new initiatives to drive growth. Management is planning to introduce a ‘Click & Collect’ service at a number of London Underground stations. The company also plans to trial sales of its TU clothing range online in the Midlands, with a view to a nationwide roll-out next year.
Meanwhile, Morrisons is launching its first Morrisons card soon, after successful trials. The firm has also earmarked £1bn for price cuts. These price cuts have already stated to take place, with some interesting results. In particular, the number of items per basket increased by 5% during the second quarter.
The bottom line
All in all, Morrisons and Sainbury’s are in a stronger position than Tesco. That being said, the two retailers are still struggling, although they have outlined recovery plans are appear to be making progress. This progress, coupled with high single-digit dividend yields make the two supermarkets look attractive as recovery plays.
