Is Wm. Morrison Supermarkets plc A Super Income Stock?

MorrisonsIt’s been an incredibly tough year for Wm. Morrison (LSE: MRW). Indeed, shares in the supermarket are down over 21% year-to-date, while the FTSE 100 is currently up around 1% over the same time period.

Clearly, the company is going through a highly challenging period and it appears as though competition in the supermarket sector is increasing, with Wm. Morrison slashing prices in an attempt to improve its top-line performance. However, despite this, could Wm. Morrison still be an attractive investment for income-seeking investors? In other words, is Wm. Morrison a super income play?

A Super Yield

Judging Wm. Morrison on its yield alone, the answer must be a resounding ‘yes’. That’s because shares currently yield a whopping 6.5%, which is highly attractive given that interest rates and inflation are currently relatively low by historical standards.

However, the question of whether this yield is sustainable over the medium to long term means that the headline figure could be less appealing in future. That’s because Wm. Morrison’s yield is forecast to be covered only once by earnings per share (EPS) in the current year. In other words, all of Wm. Morrison’s earnings are expected to be paid out as dividends in the current financial year.

A Dividend Cut?

Clearly, this situation is unsustainable as the company will need to reinvest a certain proportion of profits to, for instance, refurbish stores, open new stores and any other capital expenditures that are required. Therefore, it would be of little surprise for dividends per share to be cut, unless profits come in significantly higher than forecast over the next couple of years.

This may seem like a major negative but, since shares trade on such a high yield, it appears as though the market is pricing in a cut in dividends. Indeed, a dividend that is covered 1.5 times by profit could be sustainable, which would equate to a dividend of around 10p per share next year should Wm. Morrison deliver on its forecast for EPS of 15p. This would equate to a yield (at the current share price of 204p) of around 4.9%, which is still very attractive when the FTSE 100 yield is 3.5%. Crucially, such a yield would be far more sustainable than it is at present.

Looking Ahead

Despite shares having had a very tough time in 2014, Wm. Morrison could still prove to be a strong income play. Its current yield is extremely high and, even if it is not maintained due to concerns about its sustainability, a yield of just under 5% seems comfortable for the business going forward. As a result, Wm. Morrison continues to be a super income stock.

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Peter owns shares in Wm. Morrison. The Motley Fool has recommended shares in Morrisons.