Why Tesco PLC’s Dividends Are Safer Than Wm. Morrison Supermarkets plc And J Sainsbury plc’s

Tesco (LSE: TSCO), Sainsbury’s (LSE: SBRY) and Morrisons  (LSE: MRW) are in crisis mode.

With their sales dropping almost every day, the UK’s first, second and fourth largest retailers are struggling to prevent profits from collapsing as they fight the discounters. 

Falling profitsmorrisons

Despite the supermarkets best efforts, however, profits are falling and this is worrying many investors, including myself. Indeed, with profits under pressure, there is now a very real threat that the three grocers could be forced to cut their hefty dividend payouts in order to preserve cash. 

Unfortunately, it would appear as if Morrisons’ payout will be the first to go.

Specifically, at present the City is forecasting that the company will pay a 13.2p per share dividend during 2015. However, similar forecasts also suggest that the company will only report earnings per share of 12p during the year. This indicates that Morrisons’ present dividend payout is uncovered by earnings and will have to be paid from the company’s cash balance.

As a result, the City believes that Morrisons will cut its dividend payout by around 12%, to 11.6p during 2016. So, while Morrisons’ current dividend yield of 7.7% may seem attractive, the yield is set to fall over the next few years. 

Sainsbury'sStaying put

Elsewhere, Sainsbury’s earnings per share are expected to fall around 10% over the next two years. The company’s dividend payout is already covered twice by earnings per share. So at present, the payout does not look to be under threat.

That said, City analysts are expecting a slight dividend cut next year, from 17.3p at present, to 16.5p for 2015. Still, Sainsbury’s shares are set to yield 5.3% during 2015 and a similar 5.3% during 2016. 

Better positioned Tesco

While Sainsbury’s and Morrisons will see their dividend payouts come under pressure over the next two years, Tesco’s payout looks to be more secure.

You see, Tesco is the only one of the three supermarkets that offers a scrip dividend, where the dividend is paid in shares rather than cash, reducing the company’s financial liability. To some extent, this should increase the sustainability of the company’s payout, as it needs to distribute less cash to investors.

Still, City forecasts are predicting that Tesco’s dividend payout will fall, from 14.8p per share this year, to 13.8p per share for 2015. The company’s shares are forecast to support a dividend yield of 5.5% during 2015 and 5.4% during 2016.

What to do 

Supermarket stocks like Tesco, Morrisons and Sainsbury's, used to be a staple in every portfolio thanks to their hefty dividends. However, now the companies are struggling to compete with the discounters, many investors are turning their backs on the sector.

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Rupert Hargreaves owns shares of Morrisons and Tesco. The Motley Fool owns shares of Tesco.