Things are not going well at Morrisons. After reporting a loss for 2013, its share price fell by around 10%, and the shares are now down by more than 25% over the last year. With so much bad news in the air, is it time to sell up and move on?
I’ll start off as I usually do with a look at the company and its financial performance over the last few years.
Although the most recent results announced a loss in basic earnings, I prefer to look at adjusted earnings which exclude one-off expenses and write-downs.
In this case, there was a somewhat colossal £900 million non-recurring exceptional cost, due to the downward re-valuation of Kiddicare (an underperforming online retailer which was bought as part of the company’s original online strategy, but is no longer required) and property.
In adjusted terms, Morrisons still made a profit, although it was slightly down from last year, as was revenue. Bucking that negative trend was the dividend, which went up by 10%.
A consistent growth story
Overall, Morrisons has grown in the last decade by something like 14% a year, which is way above the aggregate figure for large companies of 2.4% a year.
Growth has been fairly steady too, with dividend growth coming in every year, and profit and revenue growth in most years. More numerically, the company has increased revenues, profits and dividends about 88% of the time. That’s better than most other large companies, which, on average, have only grown one or another of those factors 79% of the time.
It’s nice to see solid historic growth, but most investors don’t expect that sort of growth rate to continue into the future. However, the board has pencilled in a dividend increase of 5% for next year, and the company does have a progressive dividend policy, so I think a basic assumption of some growth is still reasonable.
A low price and high dividend yield
With the dividend going up by 10% and the share price falling by more than 25% over the past year, the inevitable outcome is that Morrisons shares have a high dividend yield.
The yield is currently an astronomical 6.4%, with the shares at 205p. That’s very close to the danger zone of double the market’s yield. It’s not often that you can buy a sustainable and growing dividend with a yield that is twice the market average.
Looking beyond the dividend, Morrisons PE10 (price to 10-year average earnings) is 11.3, which is significantly below that of the FTSE 100, which at 6,525 has a PE10 of 13.8. PE10 is not a suitable valuation tool for all companies, but for relatively defensive companies, it is usually far more informative than the standard PE ratio.
So from a purely numeric point of view, Morrisons is a fast-growing, relatively defensive company with shares that appear to be good value for money, with a very high dividend yield.
What’s the investment story?
The investment story for Morrisons is a simple one. At 205p, and with a dividend yield of 6.4%, if the company can maintain and even grow its dividend, there is huge upside potential in the share price in the short to medium term. Alternatively, if the dividend is cut, the story becomes one of subsequent inflation-matching dividend growth in the longer term.
Whether the dividend is grown or cut will depend on how the company is able to turn things around against the discounters, Aldi and Lidl, and also how it can move into the faster-growing areas of the grocery market – online and convenience stores.
There are strategies in place for all three of those areas, to be financed by £1 billion worth of cost savings over the next few years.
Will the plan work? Can Morrisons fight off the discounters and grow its online and convenience business enough to grow the dividend?
Unfortunately, it’s impossible to say for sure. But what really matters is how the company performs over the next five or ten years, which is the sort of time period that investors should be thinking about, rather than worrying too much about what’s happening today, this month or even this year.
Personally, my assumption is that Morrisons will be bigger in five or ten years than it is today and that there’s every chance it can grow at or above the rate of inflation for many years, and possibly decades to come.
Therefore, as a shareholder, I will not be selling my shares any time soon. There are risks, of course, but I think risks are better dealt with through adequate diversification across many companies than by trying to invest in “sure things”, which are almost invariably overpriced.
Disclosure: I own shares in Morrisons, and Morrisons is in the UKVI defensive value model portfolio.
I really would like to buy Morrisons. Since I sold out of Tesco about a year ago I’ve been wanting to buy back into the grocery sector (for a combination of the yields and diversification) but just haven’t been able to justify it.
All of the recent chatter about price wars and taking on the discounters from Germany worries me. These should be pretty lean businesses in terms of costs and efficiency so discounting aggressively must surely put their margins at risk? Add to that the additional costs from expanding their presence online and moving into convenience stores and my gut tells me the short-medium term prospects for returns are not particularly rosy.
Disclaimer: These comments are made without really doing any due diligence. Without buying ‘the investment story’ I find it hard to get motivated to crunch the numbers so I may well be wrong!
Good luck with your holding!
I think Morrisson’s is in a terrible place. It’s done everything wrong in the past few years except not build hypermarkets. It missed all the big trends, and tried to sell misted coriander to everyday Northern folk. Ken Morrison must be going mad.
All that is in the price, perhaps. (You don’t mention the property asset backing, which is amazing if accurately valued. Hence the interest of hedge funds!)
I think much is now in the price of SBRY and TSCO though after last week’s carnage, and they’re not getting squeezed out of third place by rampaging Germans.
I think the dividend will get cut, too!
Still, my view is very much consensus now, which is usually a bad thing! So you may do well. Good luck! 🙂
@Monevator – Despite living ‘daan souf’, I am half Scottish & half Scouse and the ONLY reason i ever go to Morrisons is for the misted coriander, fresh turmeric and general herb/spice department! In fact I was complaining to my wife the other day that there was no Morrisons near us!
Looks like I’m really going against the consensus view on this one.
Despite the fact investment decisions are rarely easy, I personally find the supermarkets
difficult to reach a consensus on. I think there’s value from an asset and earnings perspective in
Sainsburys, tescos, Morrison’s, but what if interest rates were higher. Tesco has that wonderful
Return on equity but Morrison’s and sainsburys seem a clearer choice near tangible book.
The potential for negative effects to earnings vs a reasonable measure of customer growth , footfall
seems to muddy the picture for me. Perhaps its an easy way of the hook to say..well I would prefer Morrison’s
at 190p to allow for downside risks medium term but all three supermarkets are not screaming out at me on price. Seems to be like comparing three fruits from the same tree at arms length.
Hi Robert, “three fruits from the same tree at arms length”, yes I agree with that. In fact I my screen thinks that all three big supermarkets are cheap, although for diversification I only own two of them.
John
Yes, you are.
The problem with these supermarkets is that one will do OK in the future in terms of investment performance. The problem is that we don’t know which of them. My feeling is that Sainsbury’s, however I will not invest in any of them.
They all invested too heavily in new supermarkets that only added a tiny profit or a loss to their bottom line. People started to order online, and Morrisons was the last one to realise the importance of this trend.
Having some supermarkets in your portfolio will not do anything wrong, having more than 2% in total could be a problem!
Wishing you luck!
Hi John
Fear not! Going against the consensus is surely the hardest thing about value investing?
I decided last summer that Morrisons would probably come down to about £2 and that if it did I would buy back in. It has taken much much longer than I thought it would. The time is now! There were several large stock purchases on Friday of millions of pounds worth of the shares at this bargain price. Of course they may come down a bit more. Morrisons will never be grocery market leader nor is that its ambition. But you have highlighted some reasonable and sensibly thought out margins of safety in your article.
There have been lots of observations in the media that Sir Ken is apoplectic and so on but we have to remember the historical fact that he was practically forced out of day to day control in the aftermath of the bungled Safeway acquisition. At the time Safeway had already invested in some of the most advanced store systems in the industry and Morrisons in their arrogance threw that technological leadership away thinking they knew best.
John Kingham said: “Looks like I’m really going against the consensus view on this one”.
Well good! I don’t want consensus returns or I would get an index fund.
“You can’t do well investing unless you think independently. And the truth is, you are neither right nor wrong because people agree with you. You’re right because your facts and reasoning are right. In the end, that’s what counts.”
Warren Buffett
Thanks for all the comments. The fact that we’re in the middle of the supermarket storm really shows up in their mix – some contrarian, some unsure, some positively negative.
I’ll leave this article to simmer for 2-5 years and revisit, at which point we may know who won the supermarket price war…