As well as the Budget, the FTSE 100 reshuffle has been on our radar this week. One of the contenders for the drop, supermarket WM Morrison (MRW), has been voted stock of the week by Morningstar Twitter followers, just beating promotion-hopeful Electrocomponents (ECM). FTSE Russell confirmed after the market close on Wednesday that Morrisons and water company Pennon (PNN) will drop down to the FTSE 250 on March 19, and Renishaw (RSW) and Weir (WEIR) are promoted to the FTSE 100.
Morrisons’ demotion comes after a period of share price weakness since the start of 2021 as the coronavirus sales boost starts to fade for supermarkets. But the firm has fallen out of the blue-chip index before, only to reclaim its place at the top table. Over the past year, the share price has been volatile for a defensive income stock; the 2020 lockdown helped shares move towards 200p and the second lockdown provided another boost, but they’ve since faded as the Government laid out plans for the end of restrictions. Still, Morningstar analyst Ioannis Pontikis thinks the shares are trading below their fair value of 197p at their current price of around 170p.
Despite the intense competition in the supermarket sector, Pontikis thinks Morrisons has a stronger balance sheet than its rivals and a better grip on costs than dominant player Tesco (TSCO) and UK number three Sainsbury’s (SBRY). On the downside, he notes that Morrisons is playing catch-up in the booming e-commerce area: Morrisons only launched its online grocery delivery service in 2013, some 13 years after Tesco. But the supermarket’s deals with the likes of Amazon (AMZN) and Ocado (OCDO) are an attempt to get up to speed – for example, in some Greater London areas, Amazon delivers Morrisons groceries via its Amazon Fresh platform.
The supermarket is also facing competition from the likes of Aldi and Lidl, new entrants which have aggressively competed on price. “Although Morrisons' price position is generally competitive, the grocer still needs to invest more in value offerings to better compete against discounters, Tesco, and Asda,” says Pontikis. Still, Lidl does not offer online delivery and Aldi has a limited offering – shoppers can click and collect or Deliveroo can fulfil orders in a small number of postcodes.
Recent figures by industry data company Kantar suggest Morrisons’ tie-up with Amazon/Ocado has helped it fight back against the discounters and increase its market share to above 10% in February, putting it in fourth position in the Big Four (in order of ranking, this goes Tesco, Asda, Sainsbury’s and Morrions).
While Britons embraced online shopping earlier than most countries, we have been relative laggards in buying groceries online until the pandemic struck. Kantar says the share of online grocery sales has effectively doubled in a year to more than 15%. Fraser McKevitt, head of retail at Kantar, says the pandemic effect on online is likely to start unwinding as schools, restaurants and coffee shops start re-opening. This explains why supermarket share prices have started to soften in advance – Tesco shares fell 20% at the end of February as the UK Government announced plans to ease lockdown. But a proportion of first-time online delivery shoppers are likely to stick with this even when lockdown ends.
As listed grocers are defensive and non-cyclical (people need to buy food whatever the economic climate) investors don’t usually expect spectacular gains from supermarkets in share price terms. That means income is a big part of these stocks’ appeal. Tesco has announced a special dividend for shareholders and Morrisons has also rewarded investors with specials in recent years: including the 4p special dividend, the total payout has increased in the last three financial years. The shares currently yield around 4%.
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