WM Morrison Supermarkets plc vs J Sainsbury plc: Which Supermarket Should You Buy?

Does either WM Morrison Supermarkets plc (LON:MRW) or J Sainsbury plc (LON:SBRY) have an edge after last week’s updates?

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Wm Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) and J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) both updated investors last week — but which firm came out on top?

Worse to come at Sainsbury?

On the face of it, Sainsbury’s results weren’t too bad. Like-for-like sales, excluding fuel, were down by just 1.9% over the year to 14 March 2015, while underlying profits were down by 14.7% to £681m.

A £628m impairment on the supermarket’s property portfolio was widely expected and in-line with those reported by Tesco and Morrison, while the full-year dividend of 13.2p provides a healthy 4.7% trailing yield.

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The problem, however, is the direction of travel: Sainsbury’s underlying pre-tax profits were down by 14.7% to £681m, suggesting that the modest decline in sales has come as a result of determined price cutting.

However, Sainsbury only delivered £50m of price cuts last year. This year, it plans to triple this, with a further £150m of cuts. The latest consensus forecasts for the 2015/16 year suggest that underlying earnings per share will fall a further 18% to 21.6p this year, down from 26.4p for the year just ended.

Similarly, Sainsbury’s new policy of maintaining dividend cover of two times underlying earnings means that next year’s dividend will fall, too, probably to about 10.5p — giving a prospective yield of 3.7%.

Although this is lower than investors have become used to, realistically, this is still an attractive yield: Tesco has yet to announce a new dividend policy, after cancelling its final payout, while Morrison’s current forecast payout of 5.7p gives a prospective yield of 3.1%.

Morrison makes progress

I was broadly encouraged by Morrison’s trading update, which suggested that the firm’s turnaround is maintaining the momentum seen at the end of last year.

Although like-for-like sales were still down by 2.9%, the average basket size was almost unchanged, down just 0.1% for the second quarter, while the number of items on promotion continued to fall, thanks to the firm’s policy of permanent low prices, rather than continual discounting.

Morrisons also confirmed that net debt is continuing to decline, falling by £150m to £2.2bn during the first quarter of the year.

However, we don’t yet know how the cost of stabilising Morrison’s sales will affect profits, as the firm’s outlook for the year only stated — rather cryptically — that underlying pre-tax profits are expected to be higher in the second half of this year than the first.

A full set of accounts and a strategy update from new boss David Potts is not expected until the firm publishes its interim results in September, although Mr Potts may reveal some of his thinking at the firm’s AGM, in June.

Is either supermarket a buy?

Investors in both firms have two choices, in my view: hold on for a gradual recovery, or sell out now and avoid what might be several years of poor performance.

At this point, Sainsbury’s performance seems more robust, and offers a more attractive dividend outlook.

Morrisons, in contrast, does not have Sainsbury’s more upmarket image to rely on, and must compete directly with both Tesco and Aldi and Lidl. It’s a tall order, and I’m really not sure what the outcome will be.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares in Tesco and Wm Morrison Supermarkets. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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