Grocery giant Morrisons (LSE: MRW) has long been a magnet for those seeking market-busting dividend yields. Underpinned by a backcloth of steady earnings expansion, the Bradford-based firm has been able to grow the annual payout at a blistering compound annual growth rate of 12.2% since 2010.
But with shoppers deserting the supermarket in droves for the neon of discounters like Aldi and Lidl, Morrisons is coming under increasing revenues pressure and saw earnings slide 8% in the year concluding February 2014, the first dip into the red for what seems an eternity.
Although Morrisons still lifted the total dividend 10%, to 13p per share, the City’s number crunchers fully expect further toil at the tills to finally put paid to the firm’s progressive dividend policy this year. Indeed, a 4% cut is currently pencilled in for fiscal 2015, to 12.5p, and an extra 17% reduction is anticipated for the following year to 10.4p.
Take heed of rivals’ signals
Still, many investors will point to the mammoth yields that these projections create despite these expected downgrades, far surpassing the current 3.3% FTSE 100 average — indeed, Morrisons carries yields of 7% and 5.8% for 2015 and 2016 correspondingly.
However, I believe that investors should take these figures with a huge dose of salt as much heftier dividend cuts could be on the cards.
Industry rival Tesco (LSE: TSCO) lit the blue touch paper during the summer when it slashed the interim dividend by a colossal 75% due to rising industry pressures. And last month Sainsbury’s (LSE: SBRY) cautioned that the full payout for this year is likely to fall, although it failed to disclose by how much.
Sales just keep on diving
Of particular concern should be the fact that the projected dividend in the current fiscal year outstrips predicted earnings, with earnings of just 12.4p per share pencilled in. A slight improvement in the bottom line next year, combined with another fall in the dividend, creates a healthier correlation, although dividends are covered just 1.3 times by earnings. Any figure below 2 times is generally considered as fragile.
And signs that conditions are worsening in the UK supermarket space should fan these concerns. Latest Kantar Worldpanel statistics last month showed sales across the sector slump 0.2% in the 12 weeks to November 9, the first drop for more than two decades and prompted by the effects of severe discounting. Morrisons itself saw revenues drop 3.3% during the period.
Worryingly the firm is promising to ratchet up its expensive price-slashing exercise through its new Match & More programme announced in November, a long-running strategy which has done nothing to resuscitate its sales prospects. And although the business has vowed to slash capital expenditure to boost the balance sheet, Morrisons will have to continue investing heavily in its online and convenience store operations to get back to growth, a bad omen for its already-gargantuan debt pile.
Given all of these concerns, I believe that Morrisons’ dividend outlook is set to deteriorate much sooner — and much more markedly — than broker forecasts currently indicate.