Morrison (Wm.) Supermarkets - As cheery as Morrissey...

Morrison (Wm.) Supermarkets: UK supermarkets are bashing their trolleys against a brick wall. The recession has left consumers more conscious of waste and shopping more tactically. The rise of home delivery and the increased use of top up convenience shopping has left the majors over-spaced (especially the beleaguered Tesco). At the same time the discounters, Lidl and Aldi, are competing hard on price and improving quality to woo the middle ground (and middle class) shopper. Into this melee, Morrison’s has added failed diversification, late adoption of convenience stores and home delivery, lack of a sophisticated loyalty programme and an IT backlog. No wonder Ken Morrison has crossed his successor, Dalton Philips, off his Christmas present list, even if some of the issues germinated on his own shift. The industry now faces having to sacrifice margin to maintain position and Morrisons is no different. Yet with the interim results the dividend was declared at 4.03p, a rise of 5% and the board stated ‘our commitment to pay a total dividend for 2014/15 of not less than 13.65p’. At the share price of 169p, this is a seductive (but uncovered) yield of 8.1%. Net debt was £2.6bn, with the board indicating a figure of £2.4bn - £2.5bn by year end, leaving net debt to EBITDA manageable at around 3x. If profits rebound sharply then maintaining the dividend through the dip will seem sensible, but even though Morrison has some opportunity for self-help, they are facing the same industry turmoil as everyone else and a sharp profit rebound seems a pipe dream for now. A dividend cover of 1.5x on the 13.65p would require eps of 20.05p, a figure which will only be reached beyond analysts’ current forecast horizons. If you are seeking secure and growing dividends then check your trolley, as this industry and this stock have some very wilful and wonky wheels right now. (1^st October 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk