Harvey Jones digs into WM. Morrison Supermarkets plc (LSE: MRW).
It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So should I buy WM. Morrison Supermarkets plc (LSE: MRW)?
When dividend maestro Neil Woodford takes a major position in a FTSE 100 stock, it is worth taking notice. He has just bought a fat slice of WM. Morrison Supermarkets, making him the company's largest investor at 7.69% (up from 5.33%). So what's so special about Morrisons? And should I buy it as well?
Woodford is picking and choosing his supermarkets carefully these days. Last year, he sold out of the UK's biggest supermarket chain Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), complaining it wasn't the defensive stock he had hoped. But is Morrisons? Is any UK retailer defensive, in these troubled times? Life is tough for UK grocery chains as their customer's wages fall behind inflation, but it has been particularly tough for Morrisons, which has come off worse in a dogfight with discount chains Aldi and Lidl. Its most recent trading update, published in January, showed a 2.5% drop in like-for-like sales. That was enough for fund manager BlackRock, which ditched more than half its 10% stake. Enter Woodford.
Horses for courses
It has been a dismal five years for Morrisons, the UK's fourth-largest supermarket. Its share price is still down 10% on five years ago, although Tesco also posted a 5% drop, while Sainsbury's (LSE: SBRY) (NASDAQOTH: JSAIY.US) barely managed 1% growth. Morrisons is struggling to reverse its recent slide in sales this year, although at least it avoided the horse meat scandal, unlike rivals Tesco, Asda, Lidl, Iceland, the Co-Op and Aldi, who were all forced to withdraw products. Yet Sainsbury's was the only supermarket to race ahead as a result, registering a 4.6% rise in sales in the 12 weeks to 17 February, according to data from Kantar Worldpanel. Blameless Morrisons suffered a 1.3% sales drop, losing yet more ground on its rivals. So what does Woodford see in it?
As a value investor, he may be impressed by Morrison's turnaround potential. Management has blamed the recent slide on its lack of smaller, convenience stores and internet no-show, and is working to reverse both omissions, and has claimed some success for its 10,000-product Own Brand relaunch. Its financial position is strong, with net debt of around £2.1 billion, and it is running a share buyback programme. Morrison currently yields 4.1%, covered 2.4 times, and management has a progressive dividend policy. That is a more generous return than Tesco, which yields 3.9% covered 2.4 times, but less than Sainsbury's, which yields a meaty (but not horse-meaty) 4.7%, covered 1.7 times.
A reason to buy Morrison
Given its recent travails, Morrisons is trading on a tempting valuation of 10.3 times earnings, roughly in line with Tesco, but cheaper than admired rival Sainsbury's at 12.2 times. An undemanding valuation and attractive dividend are the most tempting reasons to buy Morrisons. But with projected earnings per share growth of -1% to January 2014, and just 4% to January 2015, please don't expect instant results. Especially if the Bank of England's easy inflation policy further erodes Morrison's customer spending power. Tesco is the only supermarket I hold, after recent share price falls made it seem irresistibly cheap. Right now, one is enough for me.
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> Harvey owns shares in Tesco, but doesn't own any other company mentioned in this article. The Motley Fool owns shares in Tesco.