What Are Wm. Morrison Supermarkets plc’s Dividend Prospects Like Beyond 2014?

Today I am looking at grocery giant Wm. Morrison Supermarkets(LSE: MRW) (NASDAQOTH: MRWSY.US) dividend outlook past 2014.

Dividend outlook slides as sales stutter

Morrisons’ losing battle to get its transformation plan to bite is not an industry secret, and its sales struggles were laid bare once again in the firm’s post-Christmas trading update. Excluding fuel, total sales dropped 1.9% in the six weeks to January 5, while on a like-for-like basis these collapsed 5.6%.

City analysts expect Morrisons’ lagging restructuring plan to culminate in a 12% earnings collapse during the 12 months ending January 2014, with an additional 2% slip anticipated for the following year. A modest 4% bounceback is predicted for 2016.

Despite these current travails, the supermarket is anticipated to raise the full-year dividend 8.5% this year to 12.8p per share, although the effect of continued pressure on the bottom line is likely to keep the payout flat in 2015. However, an earnings improvement from the following year is expected to lead to a resumption of the company’s dividend progressive policy, with a 3% payment advance, to 13.2p, predicted for 2016.

These projections still create hefty yields of 5.1% though 2015 and 5.2% for 2016, way ahead of the current FTSE 100 forward average of 3.2%.

Morrisons has been a firm favourite with income hunters owing to its ultra-positive dividend programme — the firm carries a compound annual growth rate here of 19.4% back to 2009 — but in my opinion dividend growth projections are likely to remain comfortably below previous levels well into the future as the retailer continues to lose market share at a catastrophic rate.

And fears over the firm’s dividend prospects from next year are exacerbated by a heavy deterioration in dividend coverage, with figures of 1.8 times forward earnings from 2015 falling below the historical average well above the security benchmark of 2 times.

On top of this, Morrisons’ deteriorating cash-generating ability should also worry dividend investors, with cash and cash equivalents slumping 14% during February-July to £254m.

As Aldi and Lidl step up their expansion plans to exploit surging demand for budget goods; Waitrose enjoys the fruits of increased footfall from premium shoppers; and J Sainsbury expands its share of the rapidly-declining middle-ground, I expect Morrisons to struggle to turn around its tiring sales outlook any time soon. As a consequence I expect dividends to become less and less bountiful.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended shares in Morrisons.