The gigantic yields over at Marks & Spencer (LSE: MKS) may be enough to tempt many to splash the cash. Savvy investors should know better than to pile in though, in my opinion, given the threat posed by deteriorating conditions on the high street.
Retailers large and small are really starting to feel the pinch. Another famous name, House of Fraser, appears to be edging closer to the brink of collapse after weekend reports emerged that its lenders had rejected a rescue package launched in May, putting the future of the 169-year-old department store group under threat.
Marks & Spencer is another 19th-century retail institution flashing the distress signal. Last time I wrote about the firm in March I warned of the woes caused by its failing fashion teams and the pressure caused by intense competition and deteriorating shopper spending power. And these problems were again laid bare by scary full-year trading numbers released last month.
Food is failing, too
Back then, M&S advised that like-for-like sales in the UK dropped 0.9% in the 12 months to March, with conditions worsening from fractional falls in the first half to more sizeable drops in the latter period. Like-for-like revenues slipped 1.4% and 1.6% in quarters three and four, respectively.
As a consequence, pre-tax profit slumped 62% year-on-year during fiscal 2018, to £66.8m.
In previous years, Marks & Spencer’s woes were isolated to its Clothing and Homewares sections, although more recently its Food division has come under the cosh. Like-for-like sales here dropped last year due to “intense competition and… a progressive decline in competitiveness in the core ranges.”
If these problems weren’t enough to contend with, the FTSE 100 business is also struggling against a large cost base. Costs in the UK rose 1.8% last year as a result of inflationary pressures, the cost of new space, and the switch to online.
M&S may be taking steps such as reducing its store footprint and expanding its digital operations to put itself back on the front foot. However, it has a hell of a long way to go to overcome the colossal structural problems it’s enduring across the entire company. For this reason, I for one won’t be investing despite its low forward P/E ratio of 10.9 times.
Dividends in danger
As I say, glass-half-full investors may be prepared to take a chance given the chunky 6.4% dividend yields M&S currently offers, though.
But a word of warning. With City analysts predicting a third earnings drop in a row during fiscal 2019 — a 4% bottom-line decline is currently forecast — the retailer is expected to cut the dividend to 18.6p per share from 18.7p over the past few years.
And I fear that a much bigger reduction could be in the offing, owing to the poor dividend coverage (the predicted payout is covered just 1.4 times, well outside the accepted security benchmark of 2 times or above), a large £1.8bn debt pile, rising costs and, again, Marks & Spencer’s poor dividend outlook.
I believe there are plenty of better Footsie-listed income shares out there. For this reason share pickers should shop elsewhere, in my opinion.