It wasn’t a surprise to see Marks & Spencer (LSE: MKS), a company whose share price was recently back in recovery, last week erase all of the gains it had recorded since 2019 began in one fell swoop.
The driver behind this fresh fall? The release of another set of shocking trading results, an update in which news of a 9.9% pre-tax profits fall for last year materialised.
That said, news of an imminent share issue designed to fund the £750m joint venture with online supermarket Ocado went down like a bucket of cold sick as well.
A doomed endeavour?
As my colleague Kevin Godbold has noted in recent days, the tie-up with Ocado is a funny one as mounting competition among the industry’s major players damages the economics of selling food to the nation.
Indeed, Sainsbury’s bought catalogue retailer Argos a few years back to diversify its operations and reduce its reliance on the high-pressure grocery market. Marks & Spencer is swimming in the other direction and, most probably, into massive danger.
What’s more, it’s forking out a huge amount of money for the privilege — the 2.3% like-for-like sales decline at its Food division last year illustrates just how difficult thriving in this market can be.
Would the Footsie firm have been better off concentrating all its money and efforts into resurrecting its traditional clothing operations?Probably so, in this Fool’s opinion, given the high chances of failure and the need to get the core firing again.
Dividends to fall again?!
The boffins at UBS expect more pain to come as sales dive again and the retailer battles tax costs and anticipated dilution from the rights issue too. Earnings are expected to slip to 20.1p per share in the period to March 2020, down 21% year-on-year, a prediction which, if proved correct, would mark the fourth successive decline in annual profits.
And the frightening predictions don’t just end here. Reflecting the probability of another hard year of revenue drops and the cost of more heavy restructuring (like the planed closure of dozens of more stores), UBS is expecting the full-year dividend to fall again, to 11.2p per share, from 13.9p last time out.
Nobody ever said Marks & Sparks’s turnaround was going to be easy. But even the most patient of shareholders must be losing faith by now. Since hitting record peaks in May 2015, it’s been nothing but bad news and the stock price has dived 60%.
Attempts to revamp the quality, styling, and to ultimately salvage the reputation of its womenswear division, have hardly made a scratch. Efforts which have been made all the more difficult as competition in the mid-tier clothing space has intensified and the Brexit issue has kept consumer spending power under the cosh.
With its drive to double-down into the grocery market piling on the risk too, I’m happy to look past the company’s low valuation, as illustrated by a forward P/E ratio of 12.3 times, and it’s big corresponding dividend yield of 4.5%.
There are scores of other dividend shares I’d much rather buy before this battered retailer.
