Like the rest of the supermarket space, megastore giant Morrisons (LSE: MRW) has endured a torrid time for many, many months. Shares in the business have shed almost a third since the start of the year, and have dropped a staggering 45% from early 2012’s all-time highs above 320p.
Given this severe weakness, I am looking at whether the supermarket’s stock is now worth ploughing into at these levels.
Earnings recovery expected next year
The success of discounters such as Aldi and Lidl in attracting customers from the traditional ‘Big Four’ supermarkets has seen earnings growth at Morrisons steadily slow in recent years, culminating in last year’s humiliating 8% decline.
Since the 2008/2009 financial crisis battered customer’s spending power, the pull of these cheaper outlets has failed to abate with shoppers enjoying both the quality and price of the new kids on the block. Against this backcloth, Morrisons is expected to punch an eye-watering 51% earnings decline the year concluding January 2015, according to City brokers, although an 11% bounceback is anticipated for the following year.
These projections leave the grocer changing hands on a P/E multiple of 14.3 times prospective earnings for 2015, below the watermark of 15 which represents attractive value. And next year’s improvement drives this to 12.9 times.
Dividend yields still smash the market average
On top of this, the number crunchers also expect Morrisons to keep on offering monster dividend yields during the medium term. In the light of collapsing revenues and the costs of extensive restructuring, the company is expected to marginally cut the dividend from 13p per share last year to 12.5p in 2015, and then again to 10.4p next year.
Still, projected payments for this year and next still carry terrific yields of 7.4% and 6.2% for 2015 and 2016 respectively. By comparison, the FTSE 100 forward average rings in at a much more modest 3.3%.
But big questions still to be answered
However, I believe that investors should be aware that in reality these dividend projections could fall well short. Back in August Tesco elected to slash the interim payment by 75% to boost the balance sheet, and this week J Sainsbury said that the full-year dividend is also “likely” to fall, although it failed to disclose by how much.
Morrisons is being dragged into an increasingly-bloody price war to battle the discounters and ward off cannibalisation from its mid-tier rivals such as Tesco and Sainsbury’s. The company launched its latest Match & More loyalty card last month which will see it match the prices of the budget chains.
But such price-slashing has failed to re-ignite the fortunes of any of the established chains, while it also puts extra chain on the firm’s margins and its fragile balance sheet — indeed, Morrisons may struggle to reduce its colossal £2.6bn net debt pile in this climate. With the firm also having to ratchet up investment in the growth areas of online and convenience shopping, shareholders could see dividends come heavily under the cosh.
And until Morrisons shows tangible signs of improvement in the increasingly-fragmented groceries sector — like-for-like sales fell an extra 6.3% during September-November — I believe that the firm could be in for fresh earnings downgrades from the City sooner rather than later, in turn undermining its position as a cheap growth pick.
