Wm. MorrisonSupermarkets (LSE: MRW) is in a club of one: the Bradford-based firm has not yet cut its dividend, unlike Tesco and J Sainsbury. As a result, Morrisons shares currently offer a prospective yield of 7.4%.
Market confidence in Morrisons seems to be improving: Morrisons share price has risen by 15% over the last month, outstripping Tesco (+10%) and Sainsburys (+9%). The question Morrisons shareholders, including me, must answer, is whether Morrisons can avoid a cut or whether it has simply postponed the inevitable until next year.
In this article, Ill look at both sides of the dividend argument, and offer my opinion about the likely outcome.
Morrisons has a lower level of exposure to the over-sized stores that plague Tesco, and its ahead of its peers in terms of executing a meaningful turnaround plan: Sainsburys has only just admitted that it has a problem!
Morrisonsdoes have a strong brand for fresh produce, and its high level of supply chain ownership give it a unique selling point, which could drive sales growth and generate loyalty.
Even the firms outdated IT systems and late entrance to the online and convenience markets could help: as it corrects these issues, Morrisonsshould generate both cost savings and sales growth.
Morrisons numbers arent looking too bad, either. The firm is forecasting free cash flow of 2bn over the next three years, against a backdrop of falling net debt.
Given that the cash cost of Morrisons planned 13.65p dividend would be around 315m per year, or around 1bn over three years, this level of payout may prove to be affordable, if the firms turnaround delivers to plan.
There are some problems
Morrisonsis aiming to price match Aldi and Lidl, but it doesnt have the same low-cost business model as these firms. Thats a concern.
Whats more, this years planned 13.65p payout is not expected to be covered by earnings, which are expected to come in at around 12.2p per share this year.
Consensus forecasts suggest Morrisons dividend will fall to 10.6p next year, although the supermarkets earnings are expected to rise to 13.5p per share, suggesting that analysts are pricing in a recovery of sorts.
Christmas trading should tell us more about the success of Morrisons plans, but I intend to hold onto my Morrisons shares for now.
I believe there is at least a 50% chance that the company will maintain its payout and even if the dividend is cut, the yield should remain attractive, and offer decent growth potential.
However, you may not agree with my outlook — and there’s no doubt that Morrison does not pass the five golden dividend safety tests described in “How To Create Dividends For Life“, a brand-new wealth report from the Motley Fool.
If you’re a Morrison’s shareholder, I’d strongly suggest you take a look at this report — which also includes information about the Fool’s current subscriber-only share tips.
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Roland Headowns shares in Wm. Morrison Supermarkets and Tesco. The Motley Fool UK owns shares in Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.