The outlook for the retail sector remains uncertain. Consumer confidence is at a low ebb, and is expected to remain weak in the coming months as the Brexit process moves towards its conclusion. This may put pressure on the valuations of retail shares such as Morrisons (LSE: MRW) to some degree.
However, with the company having what appears to be a sound strategy, it may offer impressive total return potential over the long run. Alongside another dividend growth stock which released an update on Tuesday, it could be worth buying instead of investing in property through a buy-to-let.
Improving outlook
The company in question is theme park operator Merlin Entertainments (LSE: MERL). It has released a trading update for the 40 weeks to 6 October, with organic revenue growth of 4.7% being delivered during the period. This was driven by new business development, with like-for-like (LFL) revenue growth being 1.4%. Within its Resort Theme Parks division, revenue growth was 9%, while its Legoland Parks recorded revenue growth of 6.4%.
The company opened a record 644 rooms during the period, as well as six new Midway attractions. It has seen strong guest demand for its themed accommodation, while an ongoing trend towards short breaks led to a 27.7% rise in accommodation revenue.
Looking ahead, Merlin is expected to report a rise in earnings of 10% next year, which puts its shares on a price-to-earnings growth (PEG) ratio of around 1.9. Alongside its capital growth potential, the company is also expected to grow dividends by over 10% next year. Since shareholder payouts are due to be covered 2.7 times by profit, the company’s dividend yield of 2.2% could become increasingly appealing.
Changing business
The investment prospects of Morrisons also appear to be improving. Under its current management team, the business has changed significantly. It is now focused on being a wholesaler, as well as a retailer. This has opened up supply arrangements with online offerings such as Amazon, while its resurrection of the Safeway brand has led to a supply deal with convenience store operator McColl’s.
The company has also been able to reduce its debt levels in order to create a stronger foundation for long-term growth. Its confidence in future levels of profit growth has allowed it to pay special dividends, while growth in ordinary dividends of 7.5% per annum is anticipated over the next two financial years. This puts the stock on a forward yield of around 3%.
Certainly, the outlook for the wider retail sector could be uncertain. As well as weak consumer confidence, no-frills operators such as Aldi and Lidl remain a threat, while sector consolidation could cause changing dynamics over the medium term. With high-single-digit earnings growth forecast over the next couple of years though, Morrisons seems to be an improving business which could offer high total returns in the long run. As such, now could be the right time to buy it.
