The dividends of FTSE 100 companies were slashed left, right and centre through the dark days of 2008/9. But the big supermarkets marched on, delivering increasing payouts, seemingly immune to the financial crisis and economic downturn.
However, things have changed. Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) and Wm. Morrison Supermarkets (LSE: MRW) are in turmoil, losing ground hand-over-fist to hard discounters and high-end food merchants.
Dividends are already under a cloud, but what next for the payouts of the once-dependable big supermarkets? Tesco, Sainsbury’s and Morrisons are actually offering very different dividend outlooks for investors.
Tesco
At the end of August, when Tesco brought forward the start date of new chief executive Dave Lewis as trading continued to deteriorate, the company signalled its intention to slash its interim dividend by 75%.
Tesco said nothing about the final dividend, but with further downbeat trading news, including a fresh profit warning just announced, things don’t look good. I reckon the best investors can hope for is the Board cuts the final dividend by the same percentage as the interim. If so, we’d be looking at a payout for the year of 3.69p — giving a starve-acre yield of 2.2% at a share price of 168p.
However, asset sales or even a rights issue are now looking likelier to be necessary to shore up Tesco’s weakening balance sheet, so until the new boss has decided just how bad things are and how to go about fixing them, the level of the dividend and the payout policy going forward are completely up in the air.
Sainsbury’s
In contrast to Tesco, Sainsbury’s announced a very clear dividend policy when it released its half-year results last month. The Board said: “we will fix our dividend cover at 2.0 times our underlying earnings for 2014/15 and the next three years”.
Clear though the statement is, it offers little visibility on the actual levels of the dividends that will be paid. The annual payout will simply dance to the tune of each year’s earnings. For the current year, Sainsbury’s warned that the dividend “is likely to be lower than last year, given our expected profitability”.
The City consensus is for earnings of about 26p a share, giving a dividend of 13p — 25% down on last year. The analysts are expecting a further earnings fall for 2015/16, producing a dividend of not much more than 11p. At a share price of 227p, the forecasts give a current-year yield of 5.7%, falling to 4.8% next year. Those are decent yields, so there’s leeway for earnings to come in a fair bit lower than forecast and investors to still get a better dividend than the FTSE 100 average yield of 3.5%.
Morrisons
Morrisons set its dividend policy back in March. The company committed to increasing this year’s dividend by a minimum of 5% to “not less than 13.65p”. The Board further added that it was committed to “a progressive and sustainable dividend thereafter”, albeit saying “we expect dividends to grow more slowly than earnings, as dividend cover rebuilds towards our target level of around two times”.
So far, Morrisons hasn’t flinched, increasing its interim dividend in line with the full-year commitment. If the company delivers the 13.65p payout for the year, we’re looking at a mammoth 7.8% yield at a share price of 175p — and sustainable growth thereafter.
Many City analysts reckon Morrisons’ will renege on its commitment, either this year, or with a dividend cut next year. However, the company’s strategy to deliver the necessary free cash flow to support its dividend policy isn’t entirely fanciful, and investors who have more faith in Morrison’s management than in City number-crunchers may be inclined to take a chance on the stock for the supersize reward if the Board delivers.