At 172p, Wm Morrison Supermarkets’ (LSE: MRW) share price keeps slipping, seemingly locked in down trend. At this price the shares trade on a forward P/E rating of about 12 for 2016 and the forward dividend yield is running at around 6.8%.
So, is this a falling knife worth catching to lock in that dividend yield? I don’t think so, and here’s why…
Weak trading
City analysts only expect forward adjusted earnings to cover the dividend payout about 1.2 times in 2016 despite predicting a 16% earnings’ bounce-back that year after what the the firm predicts will be a greater than 50% profit collapse in the current trading year. Comfortable dividend cover from earnings would sit at about two, so the first point is that the forward dividend looks under-covered and vulnerable. Potential for forward dividend growth seems stymied by poor trading and the risk-level of a dividend cut appears elevated.
Morrisons’ first-quarter update reveals like-for-like sales down 7.1% excluding fuel; a poor result that sits well with the firm’s own prediction that full-year underlying profit will likely come in between £325m and £375m, greater than 50% down on the £785m achieved last year. Analysts’ might be right to predict a modest profit bounce-back the year after, but that doesn’t mean a new growth track is on the cards for Morrisons. It just means that emergency measures might kick-in to halt the attrition.
Such plans include finding £1 billion in cost savings over three years; improving the layout of big stores, and a catch-up investment programme to open 200 convenience stores by the end of the year and to develop internet sales.
The chairman votes with his feet
Morrisons’ chairman thinks the customer shift to value is structural this time rather than cyclical and, as if to signal what that might mean for Morrisons’ business prospects, he informed the Morrisons Board that he will not be seeking re-election at next year’s Annual General Meeting.
Plans to slash the prices of 1,200 products should help with customer retention, but will not help restore profitability. Permanent price slashing looks like a desperate measure as a mass-consumer movement to alternative value suppliers wrests power away from the big supermarkets.
I don’t think we’ll see any rapid turnaround of fortunes for the supermarkets in the middle ground, such as Morrisons. Some forward progress will probably occur, but from this new re-based-lower level. The fear is that P/E ratings and dividend payouts could be behind the curve and yet to re-base down too. I think investing in Morrisons now carries too much potential for surprises to the downside. Morrisons is a high-risk proposition despite its traditional cash-generating credentials.
What now?
Morrisons’ dividend might look attractive to some, but I prefer better prospects on total returns than just an income from my investments. There’s a good chance that further share-price drift could cancel out, or even reverse, income gains for investors. The dividend itself could fall rather than rise in the future.
