Hobson: Morrisons Unfairly Overlooked by Investors

THE WEEK: Morningstar columnist Rodney Hobson understands why investors give supermarkets a wide berth but Morrisons is doing well

Rodney Hobson 15 March, 2019 | 10:34AM
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Supermarket group Wm Morrison (MRW) is quietly going about its business, so quietly in fact that its improved performance is being overlooked by investors. If you feel you need a supermarket in your portfolio – and you can admittedly be excused for giving the highly competitive sector a wide berth – then Morrisons is worth a look.

Sales in the 52 weeks to February 3 were up 4.7% and profits before exceptional items jumped 10%. The dividend total, including another special payment, is a quarter higher than in the previous 12 months. Free cash flow is strong and debt remains at a low level.

Expansion plans have been less dramatic than those proposed at rivals Tesco (TSCO) and Sainsbury's (SBRY) but they are producing results. The programme to supply McColl’s (MCLS) convenience stores continues to be rolled out and should include the remaining 300 outlets by the end of 2019, a trial has begun to provide online shopping to Center Parc’s holidaymakers and the Safeway fascia is being reintroduced. 

Yet the shares are slow to respond. They currently trade around 225p, down from 270p last August and giving a yield of 3% based on the regular dividend or 5.6% including specials. No doubt those who got badly bitten in the dark days of Morrisons, when the last family member to run it lost control in more ways than one, are reluctant to venture in again. Also the trading update in January was mildly disappointing on the wholesale front. However, over the past two-and-a-half years the shares have found support around 210p and I believe that represents the downside.

As a shareholder in Sainsbury I am tempted to spread my risk in the sector and Morrisons looks the best prospect. My big fear is that I would be doubling my exposure to a particularly competitive part of the struggling High Street. Any fall in Morrison shares could tip the balance in favour of action.

Crazy Paving 

Landscaping products supplier Marshalls (MSLH) reported revenue up 14% and pretax profits 21% higher in the 2019 calendar year, a remarkable achievement given the severe weather conditions that disrupted the first four months of the year. Better-than-expected debt levels at year end have brought a boost to the final dividend, with the total 13% better than in 2017.

Recent trading has been strong and Marshalls is continuing with a growth strategy. It claims to be doing better than the wider market and integration of acquisitions is going smoothly.

The shares found support every time they slipped towards 400p last year but they have been on the move since last July, rising from 424p to 580p, including a 6% jump on the results. They have shot up 170% in less than three years. Even so, the yield is a decent 2.8%.

Although the good news is fully factored in, shareholders have no reason to take profits yet. However, if you are thinking of buying it may be worth holding back and seeing if the shares slip in the short term.

Berkeley Overexposed to London Housing Market

Housebuilder Berkeley (BKG) remains remarkably upbeat, reiterating its previous guidance despite “the current uncertain and volatile operating environment” and retaining its belief in “the long-term resilience and attraction of our markets of London, Birmingham and the South East”. The shares quickly edged higher, continuing their recovery from a low of £32.26 at the end of November to around £39.50 now.

Given Berkeley’s portfolio of upper end housing in London, I continue to feel nervous. It’s the most vulnerable place to be. I still believe that every portfolio should include at least one housebuilder – mine has three, which is a bit excessive – but Berkeley would not be my choice right now.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

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.

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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.