Hobson: Morrisons Ups Dividend, a Buy?

THE WEEK: Morningstar columnist Rodney Hobson weighs up the benefits of adding supermarket stock Morrisons to his basket

Rodney Hobson 14 September, 2018 | 2:46PM

food inflation supermarket morrisons tesco tesco food retailer dividend

In the topsy-turvy world of supermarkets, Morrison (MRW) continues to catch the eye as its recovery shows no sign of abating. Don’t let a bout of profit-taking after a strong run for the shares over several months convince you otherwise.

The UK's fourth biggest supermarket chain admittedly posted pre-tax profits down 29% to £142 million in the six months to 5 August, but this was almost entirely down to one-offs, notably the cost of a bond tender offer that will reduce the debt interest burden from now on. The underlying profit performance was an improvement of 9%.

Like-for-like sales were up 4.9%, thanks to a particularly strong latest quarter in which comparable sales soared 6.3%, the best performance in nearly a decade, with growth coming from increased volumes rather than price inflation. Two new stores that were opened in Cambridgeshire did better than expected.

Not only has Morrisons raised its interim dividend by 11%, it has declared a special dividend for the second time in six months. This was not enough to prevent the shares falling back on the results but some profit-taking was to be expected after a strong run from 204p in March to a five-year peak of 270p.

Much has come right after David Potts became chief executive four years ago. Its online partnership with Ocado (OCDO) is working well for both companies and there are great hopes for the deal to open franchises in McColl’s (MCLS) convenience stores.

I’m a long-term holder of Sainsbury (SBRY) and don’t want to put another supermarket in my basket. For those seeking to get into the sector, Morrison still looks as good as anything at this stage.

What Next for Dunelm

I daren’t look at what I have written previously in this column about homewares chain Dunelm (DNLM) because I have been generally negative in terms of investment potential, but I hoped I would live to see better days, as I quite like the somewhat dated feel of its store in Boston, Lincolnshire, which I have visited. It is therefore a pleasant surprise to be a little more positive this time.

Total and like-for-like sales in the year to 30 June were up 10% and 2.4% respectively, a pretty decent performance in the face of tough conditions in retailing. The dividend is raised from 26p to 26.5p, not a great leap but a positive step reflecting strong cash flow and a solid balance sheet. The yield is around 5%.

One or two question marks remain, though.

Profits were flat as Dunhelm took another hit from its unhappy takeover of Worldstores, a lossmaking internet business that has just not fitted in. This problem may be coming to an end with all the online business transferred to the Dunelm brand.

Also, Nick Wilkinson, who took over as chief executive in February, has still to prove himself, although he seems to be working out better than his predecessor. He has plans to open more stores, boost online sales and expand the range of products. If he succeeds, the future is brighter.

If, like me, you won’t invest in a company with a dominant shareholder this is not for you: the founding family still owns more than half the shares, which fell from 750p last October to below 500p. They have started to pick up. If you fancy your chances, it may be best not to delay further.

Time to Disconnect?

Another profit warning has come from logistics firm Connect (CNCT), where there is simply no consolation to be found anywhere within the business. Some people bought during the summer in the hope that the worst was over. It isn’t. Challenging conditions persist.

The recent uptick has proved to be a dead cat bounce, although it is still possible for those who bought right at the bottom to get out at a profit. They should do so while there is still chance.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Connect Group PLC37.25 GBX0.00-
Dunelm Group PLC609.00 GBX0.41-
McColl's Retail Group PLC130.00 GBX-4.24-
Morrison (Wm) Supermarkets PLC249.75 GBX-0.46
Ocado Group PLC794.60 GBX-1.07-
Sainsbury (J) PLC316.80 GBX0.32

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.