The Risks Of Investing In WM Morrison Supermarkets plc

Today I am explaining why I believe Morrisons (LSE: MRW) is set to remain a dicey stock selection.

Cannibalisation in the middle tier

Needless to say, the main bugbear for Britain’s established ‘Big Four’ grocery chains has been the relentless progress of the discounters in the post-recession landscape. The latest Kantar Worldpanel numbers suggested no slowdown in the sales boom at these outlets, with Aldi and Lidl recording growth of 22.3% and 18.3% respectively in the 12 weeks to December 7.

While Morrisons is facing an almighty battle to improve its fortunes against the budget chains — not to mention the spritely progress of high-end stores like Waitrose and Marks & Spencer — a new front is also opening up for the Bradford firm: that of an increasingly-cannibalistic middle tier.

And Kantar’s figures suggested that Morrisons is to be the main victim in this new horror story. Tesco (LSE: TSCO) saw its sales drop 2.7% in the December period, hardly cause for cheer but an improvement from the 3.7% fall the prior month and the best performance since June. Meanwhile, Sainsbury’s (LSE: SBRY) posted a dip of 1.8% versus 2.5% in November.

Morrisons saw its sales decline remain stagnant around 3.2%, but sales have dropped significantly in recent months — indeed, revenues dropped by 1.8% during October by comparison. This suggests that the premium, discount, and now the mid-tier operators are all experiencing improved custom at the expense of the Yorkshire business.

Discounting remains the key driver

Generally speaking, the British supermarket scene looks likely to remain dominated by the stalemate over who can offer the cheapest prices for your basket of goodies. Indeed, Tesco continues to introduce new and inventive ways of discounting, and its One Stop outlets are trialling limited ranges at lower prices, matching the sales models of Aldi and Lidl.

I have argued that the expensive nature of these measures makes them unsustainable over the long-term, but in the absence of other seismic ideas the mid-tier grocers continue to slash prices across the store to bring back shoppers. And for Morrisons, with its ‘growth’ sectors of convenience and online suffering from significant congestion, the business is being forced into an increasingly-aggressive, margin-sapping race to the bottom by its rivals.

Dividends in the doghouse

Against this backcloth, I believe that Morrisons’ dividend prospects are likely to come under heavy fire sooner rather than later. Tesco cut its interim payment by a colossal three-quarters back in October, while in November Sainsbury’s cautioned that the total payout for the current year will drop from fiscal 2014’s levels.

Consequently City analysts expect Morrisons to also embark on a period of sustained cuts, from 13p last year to 12.5p in the 12 months concluding March 2015. Further reductions, to 11.2p in 2016 and 11.1p in 2017, are also currently pencilled in.

However, such payments still create meaty yields of 6.8% for this year and 6.1% for 2016 and 2017, far outstripping those of Morrisons’ rivals. Considering that the business remains the runt of the British grocery sector, I believe that drastic payout cuts similar to those of Tesco could be on the cards.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of 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.