What Dividend Hunters Need To Know About Wm. Morrison Supermarkets plc

Today I am looking at whether Wm. Morrison Supermarkets (LSE: MRW) is an appealing pick for those seeking chunky dividend income.

Problems mount at the checkout

Beleaguered supermarket chain Morrisons’ financial results last month confirmed the uphill struggle it faces just to stand still. The morrisonscompany saw like-for-like sales trolley 2.8% lower during the year ending February 2014, hastening from the 2.1% decline recorded in the previous 12-month period. This result pushed the company to a £176m pre-tax loss versus an £879m profit in 2013.

The company has been unable to successfully address the fragmentation of the grocery market as budget retailers like Lidl, and high-end outlets like Waitrose, have eaten away at the firm’s market share. The company has also been a late entrant to the online shopping sphere, a sub-sector dominated by mid-tier rivals Tesco and J Sainsbury, while it expansion into the convenience store sector also lags that of its peers.

Monster medium-term yields expected

This backdrop of increased competition, not to mention heightened pressure on consumers’ spending power, has forced earnings growth steadily lower during the past five years. And this pressure finally culminated in a 8% earnings drop during 2014.

Still, Morrisons has kept the full-year dividend rolling steadily higher during this period, and even hiked the payment by a meaty 10.2% last year to 13p per share despite the sizeable earnings dip.

Analysts expect the supermarket to hike the payment again this year, although a more meagre rise is anticipated in light of a predicted 44% drop in earnings — Morrisons is expected to lift the dividend just 0.8% to 13.1p per share. Still, this colossal earnings fall is expected to result in a 5.3% dividend dip to 12.4p in fiscal 2016, even in light of a predicted 16% earnings recovery.

These prospective payments still generate sizeable yields of 6.5% and 6.1% for 2015 and 2016 respectively, however, obliterating a forward average of 2.6% for the entire food and drug retailers sector.

Payment outlook precariously positioned

But given Morrisons’ long-standing failure to get its turnaround strategy smoking, I believe that expectations of such chunky yields — at least during the medium term — may be optimistic to say the least.

Indeed, investors should be aware earnings barely cover predicted payments during 2015 and 2016, with dividend coverage running at just 1.1 times and 1.3 times prospective earnings correspondingly. These figures fall worryingly short of the widely held security watermark of 2 times and above.

The effect of declining activity at the tills on Morrisons’ cash-generation capabilities should come as further concern, and the supermarket saw cash from operations plummet 28% last year to just over £1bn. Meanwhile the company also net debt balloon to £2.8bn from £2.2bn in 2013, a situation which could also constrain future dividend growth.

Until Morrisons shows signs of getting to grips with its nosediving popularity with British shoppers, I believe that the company is likely to remain a highly risky selection for both income and growth investors.

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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.