I can see why people are attracted to the Wm Morrison Supermarkets (LSE: MRW) forecast 3.4% dividend, as the company looks to be successfully repositioning itself as more than just a supermarket retailer.
But incessantly growing competition, both from the likes of Lidl and Aldi, and from the Sainsbury-Asda merger (if it happens), could well put the annual payments under pressure. In fact, analysts are already predicting a slip to 2.8% for 2020.
The company’s latest setback at the Court of Appeal is not going to help, as judgment this week upheld a High Court verdict that it’s liable for a data breach. Employee Andrew Skelton stole payroll data, including bank and salary details, from 100,000 staff, and much of it ended up posted online.
Morrisons could now be facing compensation claims, unless it can manage to overturn the latest ruling through an appeal to the Supreme Court. With Skelton jailed for eight years, Morrisons argues that it’s not liable for his criminal misuse of the data.
But the bottom line for me is that I see Morrisons shares as being on too high a valuation for such a competitive industry, with forecasts suggesting a P/E ratio as high as 17.5 for the year to January 2020. I see the sector as being unlikely to exceed average FTSE 100 dividend yields, and I can’t see those P/E multiples above the long-term average of around 14 as justifiable.
A forecast dividend yield for Tesco of 3.4% by 2020 is probably lending some support to the whole sector, but I’m not yet convinced such levels are sustainable. And Tesco is on a lower 2020 P/E than Morrisons, of under 13, with better forecast EPS growth.
More convincing dividend
I like the idea of pooled investments as a way of spreading risk — for example, I reckon investment trusts can form a great cornerstone for a retirement portfolio. And I also see investing in a fund manager as something along the same lines, as your rewards will be dependent on how its total set of investments perform.
That’s in the long term, and an asset manager like Man Group can be affected by short-term ups and downs probably more than most. If markets are falling, for example, returns for clients won’t be so good, and Man won’t be able to charge the same performance-related fees.
But as there are considerably more up years than down years in stock markets, it should even out in the end. And though earnings have been volatile (and look likely to remain so), Man Group has been evening out its dividends pretty well.
Forecasts suggest big yields of 6.5% this year and 6.8% next, and I can see the cash as being sustainable over the long term. The payouts will perhaps be only thinly covered some years, but as long as there’s an overall progressive trend, I see no problems for those with a decades-long pension horizon.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.