Tuesday, May 21, 2013

A Closer Look at Wm. Morrison Supermarkets' Dividend Potential

LONDON -- Dividend income accounts for about two-thirds of total returns -- the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Wm. Morrison Supermarkets (LSE: MRW  ) and assessing whether the company is an appetizing pick for income investors.

How does Wm. Morrison Supermarkets' dividend history stack up?

 

2010

2011

2012

2013

FY dividend per share

8.2 pence

9.6 pence

10.7 pence

11.8 pence

DPS growth

44%

17.1%

11.5%

10.3%

Dividend cover

2.5

2.4

2.4

2.3

Source: Wm. Morrison company accounts.

Falling earnings in recent years have caused dividend growth to slow substantially since 2010's mammoth hike -- that year, Morrisons brought its dividend cover in line with the standard for the European retail industry. Still, annual dividend expansion has still remained in chunky double-digit territory during the period.

As well, dividend cover has remained above the widely recognized safety benchmark of two times prospective earnings.

What are Wm. Morrison Supermarkets' dividends expected to do?

 

2014

2015

FY dividend per share

12.8 pence

13.5 pence

DPS growth

8.5%

5.5%

Dividend cover

2

2

Dividend yield

4.5%

4.7%

Source: Digital Look.

The prospect of declining earnings is set to weigh further on dividend growth in the medium term, analysts believe, with an earnings-per-share decline of 4% this year expected to push dividend growth into single digits. A projected 4% earnings recovery next year will keep the dividend growing but won't stem the annual expansion decline, while the effect of falling earnings is expected to drag dividend cover onto the two-times security watermark.

Morrisons announced in this month's interims that total sales excluding fuel rose just 0.6% during the first quarter, with like-for-like sales dropping 1.8% during the period. The supermarket has not been able to profit from the much-publicized horsemeat scandal, which has hit rivals such as Tesco (LSE: TSCO  ) (NASDAQOTH: TSCDY  ) , and it continues to lose market share.

In better news, Morrisons announced that it had finally inked an agreement with Ocado to enter the rapidly growing online shopping space, with grocery deliveries due to commence from January next year. In addition, the supermarket is also making headway in the more lucrative convenience-store market and is on track to have 100 of these stores by the close of the year.

How does Wm. Morrison Supermarkets' dividend prospects rate against the competition?

 

Prospective Dividend Yield

Prospective P/E Ratio

Food and drug retailers

3.2%

65.4

FTSE 100

3.1%

16

Source: Digital Look.

Morrisons currently trades on a 2013 P/E readout of 11.1, beating both the FTSE 100 and its rivals in the food and drug retailing space, while it also comfortably beats both groups in terms of projected dividend yield.

The metrics are much closer when compared to British supermarket rivals J Sainsbury and Tesco, however. The former trades on a forward P/E of 11.9 and carries a dividend yield of 4.6%, while the latter provides a yield of 4% and trades on an earnings multiple of 11.6.

Despite this, I believe Morrisons lags heavily behind its rivals in terms of overall investment appeal. Sainsbury's continues to display solid momentum in the U.K. grocery space, while juggernaut Tesco's stronger financials and experience provide a better turnaround story than Morrisons. The move to online should improve Morrisons' earnings from next year, but in the meantime falling earnings could weigh on dividend growth.

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