Is Wm. Morrison Supermarkets Plc Now The Best Contrarian Opportunity In The FTSE 100?


When Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) recently revealed that like-for-like sales had collapsed by 5.6% during the key Christmas trading period, investors ran for the exit. However, now after the dust has cleared, I feel that some shareholders have turned their back on Morrisons too fast and after recent declines, Morrisons could be the best contrarian play in the FTSE 100.  

Still building the brand

Although Morrisons may have performed badly over the key Christmas trading period, the company is still working hard to increase its presence around the UK and drive sales. For example, Morrisons has only recently got to grips with online grocery deliveries, having made its first delivery in the first week of January.

Luckily unlike its peers, Sainsbury’s and Tesco, Morrisons is not having to build its own distribution network for servicing online customers. Instead, Morrisons has signed a 25-year distribution agreement with online shopping specialist, Ocado. The great thing about this deal is Ocado already has the infrastructure in place to fill and service online orders efficiently, saving Morrisons money and time.

What’s more, Morrisons is ramping up the growth of its M-local convenience store brand, and the company plans to spend £2 billion over the next two years expanding its convenience store footprint. And Morrisons’ management is not messing around when it comes to opening new convenience stores. 100 M-local convenience stores were opened during in 2013 and management expects to open the same number of stores again this year. 

Possible break up?

However, while Morrisons is still trying to grow organically, the company is being pressured by investors to unlock value from its balance sheet. The main party calling for Morrisons to reorganise its assets is US-based Elliott Associates, a well-known activist hedge fund.

Elliot has pushed for Morrisons to shake-up its property portfolio, as Morrisons owns most of its own warehouses, stores and offices, the total value of which is estimated to be worth around £10 billion — almost double the company’s current market capitalisation of £5.7 billion.

Elliot is calling for Morrisons to either sell, or spin-off its property portfolio to create more value for shareholders.

That being said, it is unlikely that Morrisons will completely sell or spin off its property portfolio but a shake-up should not be ruled out. For example, it is widely expected that Morrisons will sell and lease back some of its stores, allowing the company to reduce debt and possibly return cash to investors. 


Nevertheless, even with Morrisons’ plans for growth and a possible break-up on the cards, a complete turnaround for the company may be some way off yet. Still, for investors who are prepared to wait, at current levels Morrisons offers a pretty juicy looking 5% dividend yield. The supermarket is also anticipated to raise the full-year dividend 8.5% this year.

At present this payout looks secure. Indeed, current City forecasts estimate that the payout will be covered 1.9 times by earnings during 2014. Further, it would appear that Morrisons is generating more than enough cash from operations to cover the cumulative cash dividend payout. Specifically, during the 2013 financial year Morrisons generated £1.1 billion in cash from operations and the dividend cost a total of £270 million.

So, investors can wait for Morrisons’ turnaround story to play out, while collecting a tidy 5% per year.

Foolish summary

So all in all, after its recent declines Morrsions looks attractive as a contrarian investment. The company has value locked away in its balance sheet, is still driving hard for growth and offers investors an impressive 5% dividend yield. 

Defensive picks

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> Rupert owns shares in Tesco and Morrisons. The Motley Fool has recommended shares in Morrisons and owns shares in Tesco.