The Risks Of Investing In Wm. Morrison Supermarkets Plc

Today I am highlighting what you need to know before investing in Wm. Morrison Supermarkets (LSE: MRW).

Discount chains plan to expand

Morrisons has been one of the biggest casualties of the assault of the discount retailers, as the consequence of the 2008/2009morrisons financial crisis taught British shoppers how to become more savvy when it comes to the grocery shop.

This trend continues to send shockwaves through the industry, even though the average wallet is in much ruder health than five years ago. Indeed, latest Kantar Worldpanel data showed sales at Aldi and Lidl stride 35.4% and 22.3% higher during the 12 weeks to 22 June correspondingly, keeping their respective market shares at all-time peaks of 4.7% and 3.6%.

And these chains are looking to step up their assault on the rest of the food sector in coming years, a situation likely to take a further chunk out of Morrisons’ customer base. Lidl alone announced last month a massive £220m investment scheme to boost its store portfolio to 620 outlets — it plans to eventually get this number up to 1,500 — while J Sainsbury also announced plans to get in on the action by reintroducing the Netto brand in the UK in coming months.

Dividend forecasts too optimistic?

Morrisons is undoubtedly a supermarket star when it comes to offering bumper dividends, the business having hiked the annual payout at an eye-spinning compound annual growth rate of 12.2% since 2010. On the back of expected earnings pressure, however, City analysts expect this record to come to an sharp halt in the medium term. But even these disappointing estimates could be considered a tad optimistic by some.

The firm is expected to lift the payout to 13.1p per share in the year ending January 2015, up fractionally from 13p last year. But significant earnings pressure is anticipated to result in a dividend cut, to 11.7p, in fiscal 2016.

These prospective payments still create monster yields of 7.6% and 6.8% correspondingly, but investors should be aware that the projected payment for this year outstrips earnings of 12.3p per share. And although next year’s dividend rises back above predicted earnings of 14.6p, dividend cover rings in at just 1.2 times, well below the security watermark of 2 times.

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Royston Wild has no position in any shares mentioned.