The dividends of FTSE 100 companies were slashed left, right and centre through the dark days of 2008/9. But the big supermarkets marched on, delivering increasing payouts, seemingly immune to the financial crisis and economic downturn.
However, things have changed. Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) andWm. Morrison Supermarkets (LSE: MRW) are in turmoil, losing ground hand-over-fist to hard discounters and high-end food merchants.
Dividends are already under a cloud, but what next for the payouts of the once-dependable big supermarkets? Tesco, Sainsburys and Morrisons are actually offering very different dividend outlooks for investors.
At the end of August, when Tesco brought forward the start date of new chief executive Dave Lewis as trading continued to deteriorate, the company signalled its intention to slash its interim dividend by 75%.
Tesco said nothing about the final dividend, but with further downbeat trading news, including a fresh profit warning just announced, things dont look good. I reckon the best investors can hope for isthe Board cutsthe final dividend by the same percentage as the interim. If so, wed be looking at a payout for the year of 3.69p giving a starve-acre yield of 2.2% at a share price of 168p.
However, asset sales or even a rights issue are now looking likelier tobe necessary to shore up Tescos weakening balance sheet, so until the new boss has decided just how bad things are and how to go about fixing them, the level of the dividend and the payout policy going forward are completely up in the air.
In contrast to Tesco, Sainsburys announced a very clear dividend policy when it released its half-year results last month. The Board said: we will fix our dividend cover at 2.0 times our underlying earnings for 2014/15 and the next three years.
Clear though the statement is, it offers little visibility on the actual levels of the dividends that will be paid. The annual payout will simply dance to the tune of each years earnings. For the current year, Sainsburys warned that the dividend is likely to be lower than last year, given our expected profitability.
The City consensus is for earnings of about 26p a share, giving a dividend of 13p 25% down on last year. The analysts are expecting a further earnings fall for 2015/16, producing a dividend of not much more than 11p. At a share price of 227p, the forecasts give a current-year yield of 5.7%, falling to 4.8% next year. Those are decent yields, so theres leeway for earnings to come in a fair bit lower than forecast and investors to still get a better dividend than the FTSE 100 average yield of 3.5%.
Morrisons set its dividend policy back in March. The company committed to increasing this years dividend by a minimum of 5% to not less than 13.65p. The Board further added that it was committed to a progressive and sustainable dividend thereafter, albeit saying we expect dividends to grow more slowly than earnings, as dividend cover rebuilds towards our target level of around two times.
So far, Morrisons hasnt flinched, increasing its interim dividend in line with the full-year commitment. If the company delivers the 13.65p payout for the year, were looking at a mammoth 7.8% yield at a share price of 175p and sustainable growth thereafter.
Many City analysts reckon Morrisons will renege on its commitment, either this year, or with a dividend cut next year. However, the companys strategy to deliver the necessary free cash flow to support its dividend policy isnt entirely fanciful, and investors who have more faith in Morrisons management than in City number-crunchers may be inclined to take a chance on the stock for the supersize reward if the Board delivers.
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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of 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.