Marks & Spencer (LSE: MKS) is one of the most recognisable retail brands in the UK, and right now it is also one of the most attractive income plays in the FTSE 100. Indeed, at the time of writing the shares support a dividend yield of 7.5%.
The question I want to answer today is whether or not Marks is a good income investment for 2019?
What’s gone wrong
Usually, when a company’s dividend yield rises above the market average, it is an indication investors believe the payout is unsustainable. So, before I get into looking at M&S’s dividend credentials, I want to try to understand why the market has marked down the shares in the first place.
According to my research, it seems investors have turned their backs on it because the company is struggling to attract customers into its stores. At the beginning of November, the group announced that clothing sales declined 1.1% on a like-for-like basis in the six months to the end of September. Meanwhile, food sales fell 2.9% in the same period.
Management also warned that there would be “little improvement in sales trajectory” throughout the rest of the financial year (which includes the crucial Christmas trading period) within the same update. That’s after years of similar struggles.
To try and improve its fortunes, Marks is closing stores. It is now planning to shutter 100 stores and slow the expansion of its Simply Food convenience chain. These closures have already cost the company £320m and management reckons another £150m will be required to complete the program.
The question is, will this be enough? It has a strong reputation among UK consumers, but with the UK high street in crisis, it is highly likely trading will get worse for the group before it gets better.
Is the dividend safe?
Considering the above, I think it is highly likely that the retailer will continue to struggle in 2019, and as a result, its shares could fall further.
That being said, I am more optimistic about the outlook for the company’s dividend. Cash generation has always been a strong point for the enterprise, and it looks as if this is set to continue. In the first half of its 2019 financial year, M&S generated £434m in cash from operations and free cash flow (after deducting capital spending) of £278m. Dividends paid to investors totalled £193m, a sum easily covered by free cash flow.
For the full-year to 31 March 2018, the business paid out £300m in dividends and earned free cash flow of £500m. What’s more, the company has a relatively modest amount of debt with a net gearing ratio of only 56% at the end of the first half of fiscal 2019.
With over £5bn of property on the balance sheet against £1.8bn of total debt, I don’t think the firm is going to run into financial difficulty any time soon.
The bottom line
These numbers indicate to me that the company could be a good dividend stock for 2019. A significant decline in profitability could reduce free cash flow, but as noted above, there is plenty of headroom for free cash flow to drop before the dividend comes under pressure.
Overall, if you are looking for an income stock for 2019, I think this one could be worth your research time.
