The dividend outlook for FTSE 100 supermarkets Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) and Morrisons (LSE: MRW) has been changing rapidly.
Christmas trading updates from the trio saw developments that will impact on dividends, both directly and indirectly. So, what can investors now look ahead to?
Tesco
Having cut its interim dividend by 75%, we finally got to know what Tesco is doing with the final dividend. The answer was simple: there will be no final dividend.
There were none of the usual platitudes from Tesco’s new chief executive — “Drastic” Dave Lewis — about understanding how important the dividend is to shareholders, how hard the decision was for management to take, or that reinstating the payout will be one of the Board’s big priorities going forward. Tesco simply stated in the headline bullet points of the trading update: “Decision not to pay a final dividend for 2014/15”.
Lewis made it abundantly clear on the analyst conference call that for the foreseeable future excess cash will going to customers and not into shareholders pockets. With the focus on investing in the customer proposition (which should benefit shareholders further down the line), and a seriously stressed balance sheet, I cannot see Tesco being in a position to restart dividends until at least 2016/17.
Sainsbury’s
Sainsbury’s maintained its interim dividend at 5p a share. However, on the grounds that it is “essential” to maintain balance sheet strength, the Board said it will: “fix dividend cover at 2.0 times our underlying earnings for 2014/15 and over the next three years”.
A big drop in 2014/15 earnings is a certainty, and analysts are forecasting a further fall in 2015/16. So, the earnings-pegged dividend will decrease, too.
Current forecasts suggest a full-year payout of around 13p for 2014/15 (25% down on last year), falling to 11p in 2015/16. For existing shareholders, it’s not the greatest income scenario, of course, but infinitely better than Tesco’s.
For new investors, Sainsbury’s current share price of 262p gives a yield of 4.2% based on the 2015/16 dividend forecast. While above the market average, there are some higher yields around that I believe are more promising.
Morrisons
Morrisons is the only one of the three supermarkets that has not (so far) announced a dividend cut or payout policy change. But that could be about to change. The company has a new chairman, and, alongside the Christmas trading update, the Board announced the sacking of chief executive Dalton Philips.
The new chairman and the incoming chief exec (once he or she is appointed) are sure to revisit the old team’s dividend policy, which appears generous in the extreme compared with Tesco’s and Sainsbury’s.
The previous management had committed to paying a full-year dividend of 13.65p for 2014/15, which gives a mammoth 7.1% yield at a current share price of 193p. That may, or may not, be honoured (I suspect not). But certainly prospects for maintaining the high level of payout in 2015/16 don’t look good under a new team.
I reckon Morrisons could well lower the dividend so that it’s twice covered by earnings — in line with Sainsbury’s — which, if analysts’ 2015/16 earnings forecasts are on the button, would give a dividend of about 7p and a 3.6% yield at the current share price.
