A 4.5% Dividend Too Steady To Miss

Published in Company Comment on 29 May 2012

This sure-footed company keeps getting the basics right.

I feel almost duty bound to point out that the shares of my favourite supermarket chain, Wm Morrison (LSE: MRW), are selling more cheaply now than they were when fellow Fool Cliff D'Arcy extolled the company's virtues in March, at the time of the full-year results.

The shares were good value then, and they are even better value now. Leading the long list of the company's attractions is the forward dividend yield of almost 4.5%, more than twice covered by anticipated earnings for 2012.

Growth initiatives

Morrison gets most of my food money as well as my share money. When I go to the local store, it feels fresh and vibrant. In fact, the company has fitted its new fresh-food concept, Fresh Format, in the store. Now, exotic fruits and vegetables, temptingly arranged and bathed in swirling mist, greet me seductively as I enter the store.

These types of growth initiatives are encouraging. Morrison intends to roll out Fresh Format during 2012, and it sits well with other initiatives. For example, there are the first three 'M local' convenience stores that are performing well; the launch of Morrisons.com, scheduled for late 2012; the recent acquisition of Flower World and planned investments in meat and fish that are designed to progress vertical integration of the supply chain.

Good performance

I shop at Morrison with an investor's eye, not just as a value-seeking shopper, but also with a finger to the pulse of the place. To me, it feels upbeat, wholesome, and rather pleasant to shop there. I reckon the experience will attract others, too.

The figures suggest that to be the case:

Revenue (£m)154101647917663
Net cash from operations (£m)735898928
Diluted earnings per share22.37p23.43p26.03p
Borrowings (£m)124010521715

It's pleasing to see that cash flow has fuelled profits, which have kept the steadily progressing dividend well covered.

Meanwhile, to support £901m of capital investment during the year, debt has risen to give a gross gearing figure of about 32%.

Latest guidance

On 3 May, the company updated the market with an 'in line' statement. There was the usual cautionary note about the challenging economic environment, and assurances about the company's ability to continue to deliver profitable growth.

At today's 272p share price, you can pick the shares up on a forward earnings multiple of just under 10 for the current year, which compares to Tesco's (LSE: TSCO) forward multiple of about nine and J Sainsbury (LSE: SBRY) also at 10.

That's not a bad price for a company that seems to keep getting the basics right.

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Further investment opportunities:

Kevin owns shares in Morrison and Tesco. The Motley Fool owns shares in Tesco.

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mull1 29 May 2012 , 5:42pm

Perhaps Morrisons is a good buy at the moment, but they have moved away from the original Yorkshire style philosophy that Ken Morrison espoused. They are not now so financially conservative as they used to be. Also, Ken himself has sold nearly all his shares in them and so gives me the impression that he does not like the new management.
I have worked for them in their computer department which is very new to the business and who seem to be taking a lot of money with no real obvious rewards coming from it. However, I would agree that their 'fresh' approach gives them an edge, but how long before the others do something similar?


JeremyBosk 29 May 2012 , 11:45pm

I have noticed the queues getting longer. A cashier explained why: they are running short staffed with no cover for sickness, They are not recruiting except to replace leavers. This is penny wise and pound foolish as shoppers with a choice do choose - elsewhere.

SevenPillars 30 May 2012 , 10:44am

Despite the bad news generated by the market around these three companies, all of Morrison's, Sainsbury and Tesco's are good companies that are down more due to market sentiment regarding their sector than any real disaster in terms of the fundamentals of each.

Take Sainsbury as an example. In the last 4-5 years the share price has halved despite the fact that the company has put up good results every year in a challenging austerity consumer market. Morrison the same, although their share price, until hit by the "Tesco effect" from January, had held up quite well. Tesco is the drag on the sector, because of its lagging UK performance, however, it also continues to increase its profits if you look at the bigger picture of its international exposure. For those that think that Tesco is suffering purely because of its UK woes you really need to think again and consider that Sainsbury, a UK based operation, has actually suffered a worse share price performance despite outperforming Tesco in the UK over the last 3 years!

It really is all about sentiment. The UK retailing sector is in the doghouse with the market and until that changes its difficult to see an upside for these companies. I would suggest monitoring the long term monthly and weekly charts and look for indicator (macD/RSI, etc)/MA crossovers on these for a sentiment change before buying. They are cheap and unloved at the moment, but could still get cheaper.

merchantprince00 30 May 2012 , 1:17pm

Debt has risen!
Despite being a fan my biggest issue continues to be the £1bn share buyback program when there are so many new capital projects underway.
I am also concerned that the CEO still needs time to establish a track record and is not just looking to build a reputation by squandering all of the company's conservative strengths by turning up to the party late on a number of initiatives just as competitors are moving on.
The balance sheet might look more efficient with more debt on it but in the medium to longer term cash remains king for me.
Perhaps if they bought the shares back at current prices then I would be happier.
At least they didn't buy Iceland.





jongleur100 30 May 2012 , 8:42pm

I notice that whenever we discuss supermarket shares (the recent Tesco collywobbles being an example) we all weigh in with our faves and hates, whether we like or loathe shopping in SBRY, TSCO etc - forgetting that it's really about the stock: market dominance, profit and loss, debt (particularly), share value, innovative management, scope for future growth, expansion overseas etc. Basically each of them has problems of supply and service, and strategic overreach.
In fact I wonder if they all just need better software and more modern store management. And improved home delivery services.

jaizan 30 May 2012 , 11:50pm

jongleur100, poor service & poor stock availability are potential advance signs of a problem.
The problems I have seen in my local Tesco store resembled the shambles in Sainsbury stores 10 years ago, when they had problems.

So I avoided purchasing Tesco shares. So far that's been a good decision, but if they get their act together faster than I expect, perhaps the share price will prove me wrong.

jongleur100 31 May 2012 , 9:24pm

jaizan - But all the major supermarkets are rationing service and poor at restocking! They'll still all make money, because petrol prices force people to shop nearby, queue or no queue.
Tesco at 300p are excellent value at a P/E of 8.5. Their future growth story is well-hedged (UK/emerging) their property portfolio is strong, the 4.9% divi is well-covered at 2.5x, and they claim to be addressing the management/strategic blips that brought them down to 300p.

SBRY have a superb divi, also pretty well covered at 1.7x, a juicy 5.6% divi - excellent in these uncertain times. But growth has been pootling along sideways for years, and what's going to change basically for UK-orientated supermarkets in a UK consumer recession?

Why are we buying the UK retail sector anyway? For total return (one, three, five years) we'd have been be better off buying well-managed funds like the Unicorn Income or the Edinburgh Investment Trust - their performance far outclasses either TSCO or SBRY, and their divi of 4.7%, while not massive, isn't bad either.

DoI - I hold TSCO, EDIN. I may buy some SBRY, Unicorn Inc.

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