Is It Time To Sell WM Morrison Supermarkets Plc, Tesco Plc And J Sainsbury Plc?

Today I’m looking at three of the leading supermarket retailers.  I’ll be taking a view on the current operating environment and the impact on their ability to pay a dividend to shareholders.

It’s no secret: things are tough on the the high street, and this is especially true for our supermarkets.  Since the financial crash, customers have been tightening their belts and becoming far more savvy in the way that they shop.  Whilst some may argue that real wages are growing once more — accompanied by a reduction in the price of fuel at the pumps, thus giving the embattled consumer additional spending power — I don’t think that this alone will alter people’s supermarket shopping habits.  I suspect that we will see another price war across the board — good for the consumer but not good for shareholders of Morrisons (LSE: MRW), Sainsbury’s (LSE: SBRY) and Tesco (LSE: TSCO).

“Investing In Price”

This is a familiar line in results announcements and trading statements.  It basically means that management are reducing the prices of various items that their customers purchase.  It is something that I have noticed when I shop, but does this mean that I will keep shopping there and stay loyal to their brand?  Possibly, possibly not.  Let’s be honest — there are numerous online tools out there that constantly monitor the supermarket prices.  All you have to do is put your weekly shop into the computer and in seconds you will know where to get your weekly shop at the best possible price. Compound this with challengers like Waitrose, Ocado, Aldi and Lidl, and you have a perfect competitive storm, which will make it hard for supermarkets to set themselves apart from the pack.  Indeed, The John Lewis Partnership recently reported that trading at Waitrose had been impacted during the course of last year.  In addition, trading in the first five weeks saw like-for-like sales down by 2.8%.

One Clear Winner

Whilst this competition continues, the only winner is likely to be the consumer.  Savvy savers who are prepared to shop around for the best deals and the best prices will find themselves with extra cash in their pockets.  What they do with that cash is another matter.  Perhaps a newer car, a holiday or a new television.

One Clear Loser

It is clear to me, given the messages released by the listed supermarkets and their private competitors, that this are going to get tough.  As an investor, I suspect that shareholders are going to be disappointed when it come to dividends.  Morrisons announced that it would pay a dividend next year of no less than 5 pence per share — that equates to a yield of just under 2.5%.  Sainsbury’s has stated that the full-year dividend will be covered twice by underlying earnings for this and the following three years.  This gives a forward yield of just over 4%.  Tesco, on the other hand, had already decided to not pay a final dividend and it is unclear when they will start.  I think that this is prudent as they all need to shore up the balance sheet as they invest in price.

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Dave Sullivan 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.