Why Wm. Morrison Supermarkets plc Is On My Watch List

Wm. Morrison Supermarkets plc (LON: MRW) might have some appeal for those interested in deep value.

Mark Stones

Mark Stones (TMFMumbojumbones) joined The Motley Fool in 2014 and initially worked as a writer for Fool.co.uk, before joining the Fool’s analyst programme. Mark earned a BA in English from Loughborough University. Although he spends more time reading annual reports than Russian literature these days, he still appreciates a novelist’s antipathy toward the accepted view, which is a useful attitude when trying to sniff out hidden gems on the stock market. His approach to investing has been largely influenced by the principles of Warren Buffett and Peter Lynch. He also takes a special interest in the work of healthcare companies. Outside of investing, Mark plays guitar, enjoys good writing and has a guilty passion for combat sports.

Published 2 October, 2014 11:14 am BST

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

There are no points for original ideas in investing. It only matters if your ideas are any good or not. The proof of that shows in your returns.

It isn’t any secret — backed by many academic studies — that dividend stocks outperform the market over the long term. When stock prices fail to reward — as they have done this year, with the FTSE 100 declining 2% — dividends give investors a regular income stream and, most importantly, a reason to stay invested.

Day to day the market has a 50% chance of moving up or down, but a smart investor — with a time horizon of 20 years or more — will at worst see low single-digit upside on a diversified share portfolio.

All the more reason to hug your income shares.

We’re in a fierce bear market for the UK’s supermarkets. Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US), the number four contender, has lost 35% of its value in 2014. In August shares of the iconic retailer sunk to a five-year low. There’s nothing to suggest the shares won’t get cheaper, with a skittish market stampeding for the exits after each new trading statement.

Should we generally pay any attention to markets? I’m interested in buying great companies, and don’t especially care what anybody else is doing — except in one instance. There’s money to be made when a great company trades below its fair value, so my attention is piqued when I believe investors may be panicking.

The problem is that it’s not just investors who have hit the panic button. Morrisons’ management initiated a price war, but sales have yet to pick up. Like-for-like turnover fell 5% in the half year. “We’re lowering prices in a very difficult market. It’s going to take time,” the firm said.

It isn’t that Morrisons needs to compete directly on price with the likes of Aldi and Lidl. The offering at Morrisons is far superior, with more choice and an emphasis on fresh produce. It comes down to striking a balance between sales and profitability, and Morrisons has yet to find the right price level.

The economy showed some encouraging green shoots in 2013, with nearly half of consumers saying they felt positive about their finances. However, there’s a significant economic divide between the south of the UK and the north — the latter being Morrisons homeland.

Will consumers return to Morrisons’ stores when economic growth spreads north? The Warren Buffett quote, “If you wait for the robins, spring will be over” resonates here.

Although the +7% dividend yield may raise alarm bells, the business remains highly cash generative, and there should be sufficient cover. But this isn’t an investment without considerable risk, which means there’s potential for a higher payoff for turnaround investors.