Today I am looking at why I believe Morrisons (LSE: MRW) is in danger of a huge dividend cut.
Proud payout record on the line
Grocery colossus Morrisons has fostered a terrific reputation as a favourite among income investors, its progressive policy driving payouts at an eye-popping compound annual growth rate of 12.2% during the past five years alone. This has enabled it to keep yields comfortably north of the market average during this period.
And the firm surprised the market by electing to raise the interim dividend 5% in last month’s interims, to 4.03p per share. On top of this, chief executive Sir Ian Gibson reiterated his desire to shell out a total payment of 13.65p during the current 12 month period.
This seems at variance with escalating problems in the British grocery market, however, a phenomenon which forced rival Tesco to cut the interim dividend 75% to 1.16p per share back in August.
The spirit-crushing march of the discounters looks set to get worse as expansion plans from the likes of Aldi and Lidl kick into gear, while Morrisons’ obsession to combat them with heavy discounting continues to crush profits. On top of this, Morrisons is also nursing colossal debt levels which should hamper dividend growth, with net debt clocking in at £2.6bn during February-July.
Indeed, City analysts predict that Morrisons will actually be forced to cut the full-year payout to 12.5p per share in the year concluding January 2015 from 13p in 2014. And a further sizeable cut, to 10.4p, is anticipated next year.
Dividends on the precipice
On the back of these trading difficulties, London’s number crunchers expect Morrisons to endure a colossal 51% earnings dip in fiscal 2015. A 12% bounceback is pencilled in for the following 12-months, however.
These projections leave the anticipated dividend positioned precariously. This year’s predicted payout is covered just over 1 times by potential earnings, well below the security benchmark of 2 times, with a scant nudge higher to 1.3 times in 2016.
Despite the allure of dizzying dividend yields — forecasts for this year and next create formidable readouts of 7.9% and 6.6% correspondingly, annihilating a forward average of 3.5% for the FTSE 100 — I believe that such colossal figures are unsustainable, and that Morrisons is set to follow in Tesco’s footsteps and initiate seismic dividend cuts sooner rather than later.
