Should You Buy Supermarket Shares?

The Week: UK supermarkets have had sales bump from the panic buying and shares have been resilient in the sell-off, says Morningstar columnist Rodney Hobson 

Rodney Hobson 20 March, 2020 | 9:27AM
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Don’t get too carried away by short term sales figures from supermarkets. We’ve all seen selfish people buying stuff they don’t need and may never use in ludicrous quantities so sales since the start of this month have been inflated artificially. 

Morrisons (MRW) reported that like-for-like sales jumped 5% in the first six weeks of the financial year that began on February 3 despite a flat first four weeks. So all the sales boost came within a fortnight of frantic buying. That situation will no doubt continue for a little longer but it will peter out eventually. When it does, then people will be buying less as they use up surplus toilet rolls and other non-perishables stored in their garages and spare rooms.

Supermarkets could also be in line for a business rates holiday. Proposals include the retail sector, although details are sketchy and it is really the small shopkeepers who need help most. Any respite will be welcomed, but again it will be shortlived.

Morrisons gained 10.5% and Sainsbury (SBRY), in which I have a holding, jumped 12.7%. Tesco (TSCO) added a subdued 1.2%, but even that was respectable compared with a fall of 214 points on the FTSE 100 that day.

I suspect the gains at Morrisons and Sainsbury were more to do with these temporary factors than Morrisons' actual results for 2019-20, which are more important. While revenue and like-for-like sales slipped a little, improved margins meant that underlying profits rose 3%. Cash flow remained strong.

Sales in the first 10 McColl's converted to Morrisons Daily, the smaller outlets fascia, have been strong and customer feedback is said to be positive, which is very encouraging. Another 20 have been converted since year end and that programme will accelerate throughout the current financial year.

Morrison says sales were already on an improving trend before the coronavirus outbreak spread to the UK, despite “our continued investment in becoming more competitive”, which is the peculiar way that supermarkets say they have cut prices. Alas, the chain is not sufficiently confident to announce another special dividend as it had originally intended. Better to be sensibly cautious and keep open that option until life returns to something like normal.

Morrison shares have fallen from 230p last April to around 190p, which is pretty good compared with the carnage elsewhere. Not an obvious buy but if you already hold you should hang on. Sainsbury is down from 240p to 210p over the same period and the same advice applies. Tesco has taken more of a beating over the past four weeks but once again shareholders should stay in.   

Life Will Go On

All companies are likely to suffer to some extent from the shutting down of normal economic life for an indefinite period but some were doing better than others and will pick up better in due course. Polypipe (PLP), the maker of plastic pipes for drainage, plumbing, heating and ventilation, is a case in point.

Its products are used in housing and in civil engineering projects, often replacing old concrete and copper pipes that have outlived their lifespan. It’s easy to forget, but just a few weeks ago we in the UK were obsessed with flood prevention. That need hasn’t gone away.

Underlying revenue and pre-tax profits rose 5.5% in the 2019 calendar year. The dividend is raised 4.3%.

The shares had soared from 374p last August to a peak of 619p in mid-February but they have been dragged down to around 450p in the market melrdown. That seems very unfair. The yield is 2.8% based on the latest dividend and this is one company that is likely to pay more in the current year. If you are brave enough to be looking to invest, take a look.

 

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.