Nick Bubb’s verdict: Morrisons - from dividends to discounters

Morrisons’ beleaguered management is focused on one D, the discounters, but shareholders are focused on another - the dividend.

Morrisons’ final results and property review contained quite a few shocks, not least that the grocer feels able to increase its dividend by 5% to 13.65p in the current year.

That’s despite a huge profit warning, a ton of so-called exceptional write-offs for last year and ballooning net debt of £2.8bn.

The ‘underlying’ pre-tax profit of £785m for the year ending January was, mercifully, bang in line with revised expectations albeit down 13% on the previous year.

However, that was struck before no less than £903m of exceptional costs (including a £163m write-off on the ill-fated Kiddicare business), and Morrisons was forced to take the axe to the value of its new store pipeline, as well as that of its existing stores, given the lower margin outlook for the supermarket business and the adverse “channel shift” in the industry.

The guidance for the new year is that underlying profits will fall to only £325m to £375m, given the structural headwinds and the huge sums to be invested in cutting prices, which would only just about cover the cost of the much-vaunted dividend, let alone get near to the target cover of two times.

So why is Morrisons so intent on increasing the dividend?

Well, the logic goes that the real underlying pre-tax profit in 2015/16 will be more like £500m, because the online business development loss (set to be £65m this year) will be coming down.

And the £70m of one-off costs – ie, the trading losses of Kiddicare prior to disposal, the cost of launching the new loyalty card and various restructuring costs - won’t recur.

Morrisons is also banking on new IT systems helping it deliver some chunky operating cost savings.

But much depends on how the competition reacts and whether the market stays depressed, quite apart from whether Morrisons can deliver on its plan to improve sales while cutting back on the volume of promotions and slashing capital expenditure.

The embattled chief executive Dalton Philips inherited a business from his predecessor four years ago (one Marc Bolland, Esq) that had no exposure to what soon turned out to be the fastest growing parts of the grocery market, namely online shopping and convenience stores.

Belatedly he has addressed that via the partnership with Ocado and the opening of a 100 M Local stores a year. 

But it is the core business that was torn apart at Christmas by the relentless growth of Aldi and Lidl, and by the relentless couponing promotions of Sainsbury and Tesco, and it is that predicament that Morrison’s is now turning their attention to.

To tackle the discounters head on, Morrisons is slashing prices, beginning with own-label produce and moving on to meat and confectionery etc (if you want 2 Easter Eggs for £1.50, then you know where to go) in the hope that if it can come close to matching Aldi and Lidl’s prices, then its superior fresh food range and service etc will win back customers, when coupled with some sort of customer loyalty scheme.

But the trouble with cutting prices is that customers wonder why they were so much higher before. If volumes don’t quickly respond then the value of sales is automatically deflated. And if Morrison’s can’t keep its fresh food factories loaded then the perils of vertical integration will come to haunt it.  

Things are therefore likely to get worse for Morrison’s before they get better and the reaction of the City in marking the share price sharply lower, despite the dividend promise, tells its own story.    

The worry is that the only reason why management have promised to keep the dividend moving forward is that their own survival depended on it, given the amount of income funds holding the stock.

But when the industry and Morrisons’ profits are under such pressure, even a near-6.5% prospective yield has not stopped some investors from heading for the exit door today.

Whether other investors will demand some changes in management remain to be seen.

• Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank.