For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects;
- Risks;
- Valuation.
Today, I’m looking at supermarket chain Wm Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US).
Track record
With the shares at 257p, Morrisons’ market cap. is £5,993 million.
This table summarises the firm’s recent financial record:
| Year to February | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue (£m) | 14,528 | 15,410 | 16,479 | 17,663 | 18,116 |
| Net cash from operations (£m) | 790 | 735 | 898 | 928 | 1,104 |
| Adjusted earnings per share | 17.35p | 20.5p | 23p | 25.55p | 27.26p |
| Dividend per share | 5.8p | 8.2p | 9.6p | 10.7p | 11.8p |
1) Prospects
The table above neatly summarises the attraction of supermarket businesses as an investment in my opinion. Look at that steadily rising cash flow backing up a dividend that has doubled over five years.
If a supermarket chain can keep its customers coming back, they will come back often, and that means on-going at-the-moment-of-sale cash generation. Should Morrisons perform as well over the next five-year period there’s every reason to suppose that investors will see share-price appreciation as well as a rising dividend income. My optimism about share-price performance hinges on the valuation, which is modest now compared to 2009.
In a recent update, Morrisons reckons it is making good progress developing both its convenience store and online offerings and plans to roll out a significant presence in those sales channels. There’s still a long way to go, but the firm reckons its internet deliveries will be available to 50% of UK homes by the end of 2014. Meanwhile, we can see the pace of growth in convenience stores with the statistic that the firm opened 36 during its most recent quarter year. That brings the total to 69 across the country, with about half in London and the South East, which is a growth region for Morrisons. The directors aim is for 100 convenience stores by the end of Morrisons’ financial year in March and for a further 100 stores by the end of next year.
The big opportunity for Morrisons is to grow the breadth of its revenue through these new routes to market over the coming years. Alongside that, the firm seems focused on maintaining its competitive position through the existing store estate as evidenced by the continuing rollout of initiatives like Fresh Format, which the firm expects to be in 100 stores by its year-end.
2) Risks
The directors expect trading conditions to remain challenging for the rest of the firm’s financial year. In the quarter to 3 November, like-for-like sales excluding fuel were down 2.4% as consumer confidence remained subdued and heavy promotional activity occurred across the industry. Such challenges underline how important it is for supermarkets to get the basics right just to stay still, never mind growing.
Morrisons’ low exposure to the supermarket sector’s key growth areas of convenience and online continues to impact sales performance according to the directors. So rolling out these new channels to market seems more like a bid for survival than some great growth initiative. We have seen what happens when a supermarket takes its eye off the ball with Tesco recently. If Morrisons messes up on developing its online and convenience store formats, it’s conceivable that cash flow and profits could start to slip, which could jeopardise the dividend-progression policy.
3) Valuation
Around current share-price levels, the forward dividend yield is about 5.3% for 2015. City analysts expect forward earnings to cover that payout almost twice.
Meanwhile, you can pick up the shares on a forward P/E multiple of nearly 10 today, which looks like a fair price given 4% earnings growth expectations and allowing for the dividend.
What now?
Morrisons looks interesting as a dividend-grower to me and it’s one of several shares I’m considering for 2014 and beyond.
