Things are not going well at Morrisons. After reporting a loss for 2013, its share price fell by around 10%, and the shares are now down by more than 25% over the last year. With so much bad news in the air, is it time to sell up and move on?
I’ll start off as I usually do with a look at the company and its financial performance over the last few years.
Although the most recent results announced a loss in basic earnings, I prefer to look at adjusted earnings which exclude one-off expenses and write-downs.
In this case, there was a somewhat colossal £900 million non-recurring exceptional cost, due to the downward re-valuation of Kiddicare (an underperforming online retailer which was bought as part of the company’s original online strategy, but is no longer required) and property.
In adjusted terms, Morrisons still made a profit, although it was slightly down from last year, as was revenue. Bucking that negative trend was the dividend, which went up by 10%.
A consistent growth story
Overall, Morrisons has grown in the last decade by something like 14% a year, which is way above the aggregate figure for large companies of 2.4% a year.
Growth has been fairly steady too, with dividend growth coming in every year, and profit and revenue growth in most years. More numerically, the company has increased revenues, profits and dividends about 88% of the time. That’s better than most other large companies, which, on average, have only grown one or another of those factors 79% of the time.
It’s nice to see solid historic growth, but most investors don’t expect that sort of growth rate to continue into the future. However, the board has pencilled in a dividend increase of 5% for next year, and the company does have a progressive dividend policy, so I think a basic assumption of some growth is still reasonable.
A low price and high dividend yield
With the dividend going up by 10% and the share price falling by more than 25% over the past year, the inevitable outcome is that Morrisons shares have a high dividend yield.
The yield is currently an astronomical 6.4%, with the shares at 205p. That’s very close to the danger zone of double the market’s yield. It’s not often that you can buy a sustainable and growing dividend with a yield that is twice the market average.
Looking beyond the dividend, Morrisons PE10 (price to 10-year average earnings) is 11.3, which is significantly below that of the FTSE 100, which at 6,525 has a PE10 of 13.8. PE10 is not a suitable valuation tool for all companies, but for relatively defensive companies, it is usually far more informative than the standard PE ratio.
So from a purely numeric point of view, Morrisons is a fast-growing, relatively defensive company with shares that appear to be good value for money, with a very high dividend yield.
What’s the investment story?
The investment story for Morrisons is a simple one. At 205p, and with a dividend yield of 6.4%, if the company can maintain and even grow its dividend, there is huge upside potential in the share price in the short to medium term. Alternatively, if the dividend is cut, the story becomes one of subsequent inflation-matching dividend growth in the longer term.
Whether the dividend is grown or cut will depend on how the company is able to turn things around against the discounters, Aldi and Lidl, and also how it can move into the faster-growing areas of the grocery market – online and convenience stores.
There are strategies in place for all three of those areas, to be financed by £1 billion worth of cost savings over the next few years.
Will the plan work? Can Morrisons fight off the discounters and grow its online and convenience business enough to grow the dividend?
Unfortunately, it’s impossible to say for sure. But what really matters is how the company performs over the next five or ten years, which is the sort of time period that investors should be thinking about, rather than worrying too much about what’s happening today, this month or even this year.
Personally, my assumption is that Morrisons will be bigger in five or ten years than it is today and that there’s every chance it can grow at or above the rate of inflation for many years, and possibly decades to come.
Therefore, as a shareholder, I will not be selling my shares any time soon. There are risks, of course, but I think risks are better dealt with through adequate diversification across many companies than by trying to invest in “sure things”, which are almost invariably overpriced.
Disclosure: I own shares in Morrisons, and Morrisons is in the UKVI defensive value model portfolio.