A couple of years ago, Morrisons (LSE: MRW) was riding high, trading at 324p. Its share price has since sunk 40% to 196p, an eight-year low. This is partly a sectoral decline, with rivals Tesco (LSE: TSCO) and J Sainsbury (LSE: SBRY) also suffering at the hands of discounting upstarts Aldi and Lidl. But only partly.
Morrisons has been falling much faster than the rest of its sector. Its market share fell 3.8% in the 12 weeks to 30 March, an even worse performance than embattled Tesco, down 3%. Morrisons recently posted a £176 million pre-tax loss last year, following a 2.8% fall in like-for-like sales. Scarily, there has been talk of a 7% sales drop in the current quarter.
Given recent woes, many investors will be tempted to abandon this sinking ship. But one thing may stop them. Right now, the not-so-supermarket yields a base rate busting 6.6%. Is that reason enough to stay on board?
Frozen Goods
This raises a familiar question for investors. Do you sink your teeth into a juicy yield, knowing it’s also a sign of underlying rot? Because something definitely is rotten at Morrisons. The share price is submerged, investors are revolting, and senior management is under fire. Former director Roger Owen, who left the grocery retailer in 2009, has just called for chairman Sir Ian Gibson to stand down and claimed chief executive Dalton Philips is “out of his depth”. He described Morrisons as “a supertanker heading towards an iceberg”. No wonder investors have that sinking feeling.
Morrisons has also suffered from last mover disadvantage in the two big supermarket growth areas of convenience stores and online shopping. Its baby products business Kiddicare has flopped, demoralised staff hanker for the days of Ken Morrison, while the Bradford-based company is underexposed to richer consumers in London and the South East. To cap it all, supermarkets have been a dreadful investment for yonks. Even relatively buoyant Sainsbury’s has seen its share price fall 6% over the past five years.
Titanic Turnaround
Then again, if Morrisons was booming, it would cost a lot more than 196p. You also get it at a low, low valuation of just 7.8 times earnings, against 8.9 times for Tesco and 10.5 for Sainsbury’s. Best of all, you are picking up a mighty stream of 6.6% (against roughly 5.2% at Tesco and Sainsbury’s). The board is also committed to 5% minimum increase in the dividend for 2014/15 and a progressive and sustainable dividend thereafter. That kind of income is hard to come by these days.
But it comes at a price. You will have to brace yourself for further storms, with a forecast 46% drop in earnings per share in the 12 months to 31 January 2015, and possible bloodshed at board level. Morrisons has just launched a spirited fightback against the discounters, cutting prices on 1,200 everyday goods and launching its Love It Cheaper TV campaign. This is either a successful back to basics campaign, or an irreversible lurch downmarket, that will frighten away aspirational consumers. You decide.
Management has to launch a titanic turnaround. Yet at today’s price and yield, this grocery retailer could be worth a long-term punt. Like Morrisons. Love it cheaper.
