A 46% Crash For Wm. Morrison Supermarkets plc?

In the supermarket wars, Wm. Morrison (LSE: MRW) has been struggling. Late to get its online retail offering going, it has seen its share price slump by more than 30% over the past 12 months to 201p.

morrisonsFor the year just ended 2 February 2014, Morrisons reported a 2% fall in turnover with like-for-like sales down 2.8%. The firm also recorded a £176m loss before tax, although the launch of online selling did contribute to some big exceptional costs this time.

But even looking at underlying earnings, we saw an 8% fall in EPS to 25.2p — and that’s not good, although times are hard for the whole sector.

Ongoing slump

The problem is, things aren’t looking any better in the foreseeable future, with a hefty 46% fall in EPS currently forecast for the year ending January 2015 — and even a 13% recovery predicted for 2016 would still leave EPS far short of this year’s reported figure.

Analysts were fairly bullish on Morrisons a year ago, offering a consensus of 26.8p EPS for 2015, but that’s since been slashed by nearly half to the current 13.5p figure. Early forecasts for 2016 from three months ago had 24p pencilled in, but that’s also been pruned drastically, to a current estimate of just 15.2p.

The one thing that hasn’t really changed is the dividend forecast. A year ago the figure being plucked out of the air stood at 13.4p — today it’s only slightly behind that at 13.1p.

Now, on today’s share price, a 13.1p dividend would offer a yield of 6.5%! They don’t come much better than that, so is Morrisons worth buying as a solid income stock?

Dividend at risk

The sad answer is no, for the simple reason that forecast dividends would be barely covered by earnings — earnings should only just exceed the forecast dividend this year, with cover rising to only around 1.3 times based on a small dividend cut forecast for 2016.

And that just isn’t sustainable for any real length of time — to put it into perspective, Tesco‘s dividend should be nearly twice covered by earnings in 2015.

The bears’ claws

ThumbDownIt should be no surprise, then, that the bulk of the City’s pundits are urging us to sell Morrisons shares. There are 10 Strong Sell recommendations out there right now, compared to four Strong Buy tags — my only curiosity is how even four of them rate Morrisons so highly, though the company’s house broker is pretty much obliged to say nice things.

On the whole, this is a very bearish stance on Morrisons — and I certainly wouldn’t be buying any shares based on it.

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Alan does not own any shares in Wm Morrison or Tesco. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.