If you’re looking for dividend stocks you can buy and hold forever, then supermarkets could be a good choice.
Although fast-growing discounters Aldi and Lidl have caused a lot of disruption, the big four supermarkets still account for around 70% of all grocery sales. I don’t think that size advantage is likely to disappear anytime soon.
Of course, not all supermarkets are equal. Although I’m quite keen on Tesco, due to its 28% share of the market, my top pick in the supermarket sector is Wm Morrison Supermarkets (LSE: MRW).
A basket of good figures
The Bradford-based firm announced this morning that shareholders will receive a special dividend of 4p for last year, lifting the total payout to 10.1p. That’s an 85% increase on the previous year and gives the stock a total yield of 4.5%, at current levels.
This generous payout has been made possible by another strong year for the firm. During the 53 weeks to 4 February, Morrison’s underlying pre-tax profit rose by 11% to £374m. Full-year revenue rose by 5.8% to £17.3bn, while like-for-like sales were 2.8% higher.
These figures suggest to me that the group is maintaining its market share, despite growth from Aldi and Lidl. Recent data from market research group Kantar Worldpanel supports this view, showing that Morrisons’ 10.6% share of the UK grocery market is unchanged from one year ago. In contrast, Tesco, Asda and J Sainsbury have all lost market share over the year, according to Kantar.
Why I think this is a great business
Morrisons is unique among the big UK supermarkets because it owns most of its supply chain. It has abattoirs, food production facilities, and even grows some of its own produce. This ‘vertically integrated’ strategy has given the group a couple of advantages over its rivals in recent years.
The first is that exposure to unfavourable foreign exchange rates on imports has been minimised. The second advantage is that the company has a built-in wholesale business. It’s using this to become a major supplier to the convenience store and online markets, without having to buy or run any stores. Deals to supply McColl’s stores and Amazon show me the value of this approach.
Why I’d buy this stock
There’s no guarantee that this year’s special dividend will be repeated — and without this payout, the yield would be just 2.7%.
However, this payout is underpinned by genuine free cash flow, reducing the chances of a cut.
Morrisons’ £5.3bn market cap is also backed by £4.1bn of tangible net assets, including property and plant worth £7.2bn. Net debt fell by a further £221m to £978m last year, which I see as a comfortable level. The risk of financial problems seems very low to me.
Against this stable backdrop, growth is expected to remain ahead of inflation in 2018/19. Analysts are forecasting earnings per share growth of 8% this year, with a corresponding 8% dividend hike. This puts the stock on a forecast P/E of 17.4 with a prospective yield of 2.8%. I believe this could be a profitable entry point for a long-term buy-and-hold investment.