MENU

Will WM Morrison Supermarkets PLC Cancel Its Dividend This Year?

Whenever a new management team is put in place, they arguably have more licence to change things than the previous management did. After all, it’s difficult to change your own existing strategy, but is relatively straightforward to bring a new one in with you.

This point is highly relevant when it comes to Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US), since it is in the process of finding a replacement for current CEO, Dalton Philips, whom it recently announced will be leaving the company.

As a consequence, investors will rightly be concerned that major changes could be afoot, including to the company’s shareholder payouts. In fact, there are rumours of a cut or even a cancellation of dividends (as took place at Tesco).  Could this happen sometime this year?

A New Strategy

Morrisons has belatedly pursued a strategy of expanding into the on-line space and also opening scores of convenience stores across the country. The main reason for doing so is that both of these areas offer much higher sales growth than the traditional supermarket space. Morrisons lacked exposure to them and was attempting to play catch-up in a relatively short space of time.

While both of these ideas are sound, and have been enthusiastically  pursued at other major supermarkets, they will take time to have an impact on the Morrison’s stop and bottom lines. A new CEO may decide that there is little point in persisting with unprofitable convenience stores that may one day come good. Similarly, he or she may feel that a narrower, more focused on-line presence is more prudent while Morrisons endures a challenging period.

Further Investment

While both of these moves would generally cut costs, it is likely that a new CEO will want to have  a significant ‘war chest’ available with which to go on the offensive and counter the investment in keen pricing being undertaken at rival supermarkets. While Morrisons does have a strong balance sheet with low debt, it is currently forecast to pay out a whopping 75% of profit as a dividend in the next financial year.

For a company that is facing such challenging trading conditions, this appears to be far too high — even though dividends per share have already been cut by around 21%. Therefore, it is very likely that a dividend cut will be made at some point this year, although the cancelling of long term dividend payouts is far less likely. That’s because any new CEO will not wish to damage shareholder relations through making dividend payments extinct, but will rather seek to strike a balance between rewarding shareholders and also retaining sufficient earnings to reinvest in the business.

Looking Ahead

While Morrisons is facing a difficult period at the moment, the outgoing CEO has already set in motion a number of sound plans that could provide the company with a bright long term future, notably with regard to going on-line, shifting the focus of the estate southwards, and opening convenience stores .

Certainly, a new CEO will inevitably make further changes and, to do so, more cash will be needed. Therefore, the current forward yield of 5.4% is an unrealistic expectation, although as we have seen with Tesco’s shares (which are up 18% year-to-date) a dividend cut and a new plan can cause shares to rise at a rapid rate. Therefore, it may not all be bad news in 2015 for Morrisons and it could be an excellent turnaround play.

Of course, finding potential turnaround stocks, such as Morrisons, is never an easy task. That's especially the case if, like most people, you lack the time to trawl through the index looking for them.

That's why The Motley Fool has written a free and without obligation guide called 10 Steps To Making A Million In The Market.

It's a step-by-step guide that could help you to unearth the FTSE 100's hidden gems and make 2015 an even more prosperous year for your portfolio.

Click here to get your copy - it's completely free and comes with no obligation.

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