Morrisons(LSE: MRW) shares currently support a dividend yield of 6.8%, offering a level of income youd be hard pressed to find elsewhere.
However, theres noguaranteethat this payout is here to stay and investors should be prepared for the worst.
According to Morrisons cash flow statements, the companys dividend payout cost a total of 283m last year. Dividends issued during 2014 totalled 13p per share, an average yield of 5.4%.
Under Morrisons old management, this payout was considered to be gold-plated. Now a new management team is moving into place, they could reconsider this dividend strategy.
It is clear that the supermarket sector as a whole is under pressureand the figures show that Morrisons isnt doing any better than its larger peers. For example, Morrisons earnings before interest, tax, amortisation and depreciation margin is set to fall to 5.1% this year. Peers,TescoandSainsburysare expected to report EBITDA margins of 4.8% and 5.5% respectively.
Moreover, Morrisons actually has the highest debt level of its peers. The groups net debt to EBITDA ratio is set to hit 2.7x this year, compared to Sainsburys ratio of 1.8x and Tescos ratio of 3.2 Tesco is currently weighing up the sale of assets worth more than 5bn which will drastically reduce debt.
That being said, Morrisons is planning to generate2bn of cash and 1bn of cost savings over three years, which should help to pay down debt. However, by cutting the dividend payout by 50%, the group could save 140m per annum or 420m over three years a significantsum.
And when you consider the fact that Morrisons is planning to spend 1bn cutting prices over the next three years, additional savings of 140m per annum could be a game changer for the company.
Indeed, if management were to cut the dividend by 50%, and plough the cash saved into additional price cuts, the company could increase its price cutting budget by 42%.
Morrisons has already committed the most cash to price cuts out of the big three supermarkets. An additional 420m would blow competitors out of the market.
A 50% cut in the dividend would mean that Morrisons annual payout fell to 6.50p per share, a yield of 3.4% based on current prices similar to the FTSE 100s average dividend yield of 3.2%.
The bottom line
Overall, with the supermarket sector in crisis, Morrisons lofty dividend yield of 6.8% seems excessive and the company would benefit from a dividend cut.
Morrisons previous management made a commitment to the payout but now the group is about to be taken over by a new management team, all bets are off. The new management team could decide that a dividend cut is the best course of action for the company.
With that in mind, if you brought Morrisons for its lofty dividend yield, it could be time to sell up and move your money elsewhere. And if you’re looking for other top dividend paying stocks, then why not check out The Motley Fool’snew income report double pack.
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