WM Morrison Supermarkets (LSE: MRW) has really reinvented itself as a great dividend growth stock since the profits woes and colossal debt pile prompted it to rebase the dividend a few years back.
In the year to January 2018, for example, it lifted the total ordinary dividend to 6.09p per share, up from 5.43p the year before, while also shelling out a special dividend of 4p. As a consequence the total shareholder reward surged 85.8% year-on-year.
City forecasters are predicting further chunky earnings growth in fiscal 2019 too, by 9%, and so they are expecting more dividend growth. Consensus forecasts don’t mention another supplementary dividend but they do suggest an improved ordinary dividend to 8.4p per share.
That said, another bulky special dividend could well be in the offing after Morrisons paid a special interim payout of 2p per share, taking the total half-time dividend to 3.85p, a 132% on-year increase. A 9% rise in underlying pre-tax profit during February to July, to £193m, and the extra £44m shaved off its net debt pile in the six month, encouraged Morrisons to continue splashing the cash.
Competitive crush
While I’m sure the FTSE 100 grocer has the financial might to dole out another great dividend increase this year, I remain wary of investing in the business owing to the increasingly competitive trading landscape that casts a pall over its long-term outlook.
More specifically, I am concerned about the stunning progress discounters Aldi and Lidl are making, two firms that ripped up the rulebook with their hugely-popular value model, and whose ambitious expansion programmes are helping to deliver the sort of sales increases that frankly embarrass the so-called Big Four supermarkets.
Added threats to Morrisons come in the form of the proposed merger between J Sainsbury and Asda, a move that promises to intensify the price wars even further, and Amazon’s recent entry into the online marketplace.
So what’s the verdict?
The challenging business environment was highlighted again in Morrisons’ third quarter financials released last week. Like-for-like sales growth at its stores almost halved to 1.3% between August and October from 2.5% in the prior three months, while the number of transactions crawled just 0.2% in quarter three.
Like-for-like revenues grew a more encouraging 4.3% in the last quarter and helped group sales on the same basis (excluding fuel) rising 5.6%. Encouraging, sure, but while Morrisons’ higher-margin retail operations struggle, you can’t help but worry about the company’s future earnings, and thus dividend, outlook.
At current prices Morrisons sports a forward P/E ratio of 18.7 times, a reading which in my book nowhere near reflects its high risk profile. I wouldn’t bank on the retailer helping you to retire early given the rate at which the UK supermarket industry is fragmenting — indeed, at its present valuation I’m happy to steer well clear of the company.
