The Best Reason To Buy Wm. Morrison Supermarkets plc?

If you asked me to name the most attractive share in the FTSE 100 to buy today, I’d find it hard to choose — but it wouldn’t be Wm Morrison (LSE: MRW) (NASDAQOTH: MRWSY.US), for sure.

But somebody’s buying Morrisons shares, so why?

A horrible year

The company’s woes are well-known. With the whole sector being pressured by competition from the Lidl and Aldi cheapies, Morrisons is the most vulnerable of the FTSE 100 supermarkets as it is so far behind in terms of online shopping and mixed-format stores.

That’s certainly not a good reason to buy the shares.

Earnings per share fell by 8% last year, which is bad enough, but there’s a 50% slump expected this year. That’s not a good reason to buy the shares either.

morrisonsDividend overstretched

While Morrisons was hurtling headlong into its current crunch, it just kept on bumping its dividend every year, and last year it provided a yield of 5.4%. Recent forecasts suggested a 7% yield for the year to January 2015, which would be a good reason to buy the shares.

Except that it’s widely expected that Morrisons will announce a dividend cut along with first-half figures due on Thursday 11 September. Rival Tesco famously slashed its interim payout by 75% recently, setting a precedent for the sector.

Hmm, perhaps not a good reason to buy after all.

Share price crash

The share price has collapsed over the past year, losing 40% to today’s 175p, and now we’re starting to see what actually might be good reasons to buy. After the slump, the shares are still on a forward P/E of 14, mind, so anyone buying now would be wanting a pretty sharp return to earnings growth.

There’s an 11% EPS rise forecast for 2016, but with so much uncertainty surrounding the sector and the company, that’s not worth a lot right now.

But let’s get back to that dividend. With the falling shares having pushed the yield so high, there’s room for a substantial cut while still leaving a decent return at today’s price.

In fact, if last year’s payment was cut by 50% to 6.5p per share, that would still provide a dividend yield of 3.7% — above the FTSE 100 average, and covered 1.9 times by forecast earnings.
It would leave Morrisons with some spare cash, and if EPS starts to rise again the following year, there could be room for the dividend to start to grow again.

Here’s why

So, perhaps ironically, a dividend cut this week could prove to be a good reason for buying Morrisons shares, in the hope that it will help with a longer-term recovery.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.