Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) has been touted as a ‘buy’ by many investors over the last six months or so, thanks to its sector-leading dividend yield, low P/E and apparent growth potential.
However, I’m going to sail against the wind and suggest that now is not a good time to buy Morrisons shares. Indeed, I reckon it might even be a good time to sell.
Uphill struggle
It’s no secret that the UK supermarket sector’s four main players, Tesco, J Sainsbury, Asda and Morrisons are all engaged in battle on a number of fronts.
Sales at discounters Aldi and Lidl are rising, as are sales at the UK’s two premium players, Waitrose and Marks and Spencer. The big four are being squeezed in the middle, and in my view, Morrisons is least able to deal with twin onslaught. Let me explain why:
1. Morrisons’ 11.5% share of the UK grocery market makes it the smallest of the big four, and most vulnerable to being squeezed out in areas where its reach is marginal. Meanwhile, its working-class image and northern roots are least likely to help it attract affluent customers from Waitrose and Marks & Spencer.
2. While Tesco, Sainsbury and Asda can all use their sophisticated online ordering and home delivery operations to help retain customers and differentiate themselves from Aldi and Lidl, Morrisons can’t. Although Morrisons’ online service is due to be rolled out next year, it will only reach 50% of UK homes by the end of 2014, and may yet suffer delays and teething problems.
3. Along with the internet, convenience stores are the other big growth area in grocery shopping. Morrisons expects to have opened 100 M Local stores by the end of 2013, but Tesco already has 1,547 express stores, 639 one-stop stores and 192 Metro stores.
4. Tesco’s Clubcard loyalty programme has around 16 million members, while Nectar, of which Sainsbury is a key part, has more than 19 million members. The data from these two loyalty schemes provides an amazing level of insight into customers’ habits, needs, and wants. Morrisons’ lack of a loyalty programme means that it doesn’t have this kind of information about its customers.
Is Morrisons still a good income buy?
Morrison’s 5.0% prospective yield is certainly attractive, but the firm’s debt levels are rising, and if sales don’t follow, I believe Morrison’s dividend could come under pressure.
