Once upon a time supermarkets made steady margins and paid regular dividends of 3% to 4% or so, but those day are rapidly disappearing.
Tesco (LSE: TSCO)(NASDAQOTH: TSCDY.US) was the first to crumble, and it was very much a necessary move. The year to February 2014 was the last year of old-style dividends, and though the annual payment had remained at 14.76p per share for three years in a row, it still yielded 4.4% that year — and the only real surprises is that Tesco’s management took so long to realise that they desperately needed to slash the cash.
This year shareholders will do well to pocket 2p per share, for a yield of less than 1% on today’s price of 242p, but forecasts have that doubling by 2017, but still being very well covered by earnings. The prospect of further cuts for Tesco is looking remote.
Knives out
Wm Morrison (LSE: MRW)(NASDAQOTH: MRWSY.US) held out for a long time, despite plunging earnings, and it’s on for a 6.8% yield for the year ended January 2015 — if the consensus is to be believed. But most observers will see the arrival of new chief David Potts, previously at Tesco, as a herald of reality, and that dividend is almost sure to be cut.
Although Morrison’s cost-cutting strategy looks effective and it’s expected to save around £1bn over three years, with the City predicting a return to earnings growth, the company is still sitting on massive net debt which stood at £2.6bn at the interim stage — and that was a full 30% of first-half turnover.
No, that overly-generous dividend just has to be sliced, and the only question is by how much. Analysts are predicting a 40% cut by 2017, but that includes some older estimates and would still yield more than 4% on a price of 194p — I’d say the real cut is now likely to be significantly harsher than that.
Dividend safe?
The pressure is on at J Sainsbury (LSE: SBRY) too, and there’s a cut of more than 25% expected in the full-year dividend to March 2015. With the shares on 271p, that would still provide a handsome yield of 4.7%, but there’s a further cut to 4% predicted for 2016. At first-half time the interim payment was held at 5p per share, and the company told us that it intends to “fix dividend cover at 2.0 times our underlying earnings for 2014/15 and over the next three years“.
Net debt stood at £2.4bn at the end of September, although turnover was 60% higher than Morrison’s, so the debt situation isn’t so pressing. But the supermarket price wars are going to continue and there will surely be pressure on Sainsbury to cut its dividend and extend cover to release more cash for fighting off the competition. At this moment, banking on that two times cover might perhaps not be wise.