The Motley Fool

Is the Marks and Spencer share price a FTSE 100 falling knife worth catching after today’s news?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Businessman standing in front of screen
Image source: Getty Images.

Shares in Marks & Spencer (LSE: MKS) are down heavily today. That’s after the high street retail giant announced a £600m rights issue and 40% cut to its final dividend to fund a much-rumoured, now-confirmed joint venture with fellow FTSE 100 constituent Ocado (LSE: OCDO).

Are the company’s plans to finally enter the home delivery market and “transform online grocery shopping for UK consumers” sufficiently robust for new investors to get involved? Or could there further share price falls to come? Let’s start by looking at today’s deal in more detail. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Done deal

Under the terms of the agreement, M&S has agreed to pay £750m to acquire a 50% share in the Ocado’s UK retail business. Eighty percent of this will come from selling new shares to investors. 

The rationale behind the deal is that it will allow Marks to benefit from Ocado’s technology and deliver some much-needed growth. The latter will get access to the former’s products, brand and information on its 12m food shoppers from September 2020 “at the latest,” once its current deal with Waitrose expires. The joint venture will trade as

In addition to generating cost savings of at least £70m per annum by the third year of the deal, M&S CEO Steve Rowe claimed that those currently shopping with Waitrose through Ocado would benefit from his firm’s lower prices. Quite whether consumers will want to make the switch remains to be seen, of course. 

Show me the money!

Transformative or not, all this needs to be paid for. Clearly, news that the company has taken a knife to its dividend is bound to leave some investors smarting. Personally, I wouldn’t feel that aggrieved just yet. 

Following today’s cut, the company intends to pay a final dividend of 7.1p per share. Since M&S has hinted that this marks the beginning of a “resetting” of the dividend, it’s worth applying the same cut to next year’s interim dividend. A 40% reduction from the 6.8p paid in January and added to 7.1p would leave M&S yielding 4.1% in 2019/20. That’s hardly awful.

More questionable is whether M&S is paying too high a price to acquire a 50% stake in a company that only made £80m in profit last year. Rowe doesn’t think so, having stated that the deal allows the retailer to move its food offering online “in an immediately profitable, scalable and sustainable way.” Time is money, and M&S’s leader is clearly in a hurry. 

Not that Ocado’s owner will care. Its shares are up almost 5% today, giving some indication of who the market believes is benefitting the most from the deal. 

How patient are you?

Clearly, M&S had to do something to revive its fortunes following years of falling sales. If market participants wanted decisive action, they’ve got little to complain about now.

But should those following an income and/or value-focused strategy be tempted to catch this falling knife? Only if they already hold a diversified portfolio of stocks, in my opinion.

At 12 times predicted earnings before markets opened this morning, the shares were already fairly reasonably priced but — with so much still to be confirmed —  I wouldn’t expect a sustained recovery to the price anytime soon.

Short-term pain for long-term gain? Whatever happens, today’s deal marked a new, potentially fascinating chapter in the Marks & Spencer story.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.