Are the supermarkets a buy? There has been a lot of debate about the prospects for the supermarkets.
The bull and bear cases
The bulls say that the supermarkets are still a very good buy. They say they are gradually taking business from corner shops and the high street, as they expand their business beyond groceries to homewares, health & beauty, financial services, clothing and consumer electronics. Plus, as the economy recovers consumers will begin to spend more, and much of this extra spending will be in supermarkets.
However, the bears say that the supermarket business is fragmenting, as more high-end customers move their business out to Waitrose and Marks & Spencer, and more low-end customers shop at Aldi and Lidl. The mid-market, meanwhile, is being squeezed. Competition among the supermarkets is now fierce.
I would say reality is somewhere between these views. The main supermarkets are now unlikely to grow rapidly outwards. I suspect they are still gaining market share from the high street, but they are also taking business from each other.
Solid, stable, low-growth businesses
The supermarkets are thus solid, stable businesses that are unlikely to grow substantially. I would class them as defensive, high-yield investments.
Take the case of Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US) . I see this company growing through its internet collaboration with Ocado, and its expansion into town centre mini-marts. But I also see it losing business through Aldi, Lidl and an Asda that has recently announced it is reducing prices once again.
Yet Morrisons is cheap: its P/E ratio is just 10, with earnings predicted to be stable over the next few years, and a juicy dividend yield. Thus I would say this company is a value investment with the potential for share price growth and a steady dividend yield. The recent share price fall has created a buying opportunity.
So I would rate Morrisons a cautious buy, particularly for investors seeking out a substantial dividend yield and a stable if low-growth investment. I currently own Morrisons shares, and I will continue to hold.