3 Things That Say Wm. Morrison Supermarkets plc Is A Sell

morrisonsWm Morrison (LSE: MRW) is in trouble, as shareholders know only too well — the share price has tumbled by 40% over the past 12 months to 171p.

At the cut-price end of the market, Aldi and Lidl are cleaning up, though Morrisons is vying for the same kind of offering as the big three — Tesco, Asda and Sainsbury. But it’s behind the times and being squeezed out of the running. Even with the price crash, I still rate Morrisons a sell. Here are three reasons why:

1. Catch-up

Morrisons is always playing catch-up with the others. Online shopping? Horribly late to get started up, Morrisons has only just managed to get its offering going. Convenience stores? The market leaders have them all over the place and have had for some time, but again Morrisons is only just getting started.

In its full-year results to February 2014, chairman Sir Ian Gibson even said “…we do not yet have a meaningful presence in online and convenience“. Being late into the fastest-growing segments of the food retail market is going to hurt.

2. Dividends

Morrisons is on for a dividend yield of 7.4% for the current year, yet I think that’s a reason to sell? The forecast payment of 13.1p would actually be in excess of expected earnings per share (EPS), with EPS predicted to fall by 50%! And even though the following year has a 17% EPS recovery penciled in, the expected smaller dividend of 11.7p would still only be covered by 1.2 times by earnings.

Last year the firm upped its dividend by 10%, telling us that its “commitment to a minimum 5% increase in 2014/15” would “demonstrate its confidence in the future of the business“.

But that’s clearly not convincing the market, and its not convincing me — get the bread buttered first, Morrisons, before you take the lid off the jam!

3. Tough markets

On top of Morrisons’ specific woes, the whole supermarket sector is going through a tough patch right now. Even Tesco, which led where Morrisons can only belatedly follow, is famously struggling to get its profits back up.

When the going is tough and the whole field is struggling, you should be backing the favourites, not the also-rans.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool owns shares in Tesco.