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Morrison - special dividend announced

Nicholas Hyett | 13 March 2019 | A A A
Morrison - special dividend announced

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Morrison (Wm) Supermarkets Ordinary 10p

Sell: 238.10 | Buy: 238.20 | Change -2.10 (-0.87%)
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Full year like-for-like (LFL) sales, excluding fuel, rose 4.8% - driven by the wholesale division. Underlying profit before tax rose 8.6% to £406m.

The board has announced a final dividend of 4.75p and special dividend of 4p, which takes the total dividend to 12.6p - up 25% on last year.

The shares rose 1.5% in early trading.

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Our View

CEO David Potts is doing a good job of turning Morrison's around. Four years into the transformation, a renewed focus on widening store appeal has been successful, with like-for-like sales and customer satisfaction ratings continuing to climb.

But that's only one side of the coin. Wholesale supply deals, with the likes of Amazon and McColl's, generated £700m of sales last year - and that number's expected to hit £1bn soon.

Unfortunately competitive pressure in the groceries markets shows little sign of letting up. Morrison's lower price point means Aldi and Lidl are a threat, and while the CMA blocking an Asda/Sainsbury merger will have been a relief, we wouldn't rule out other suitors eyeing up Asda in the future.

The lack of a meaningful online business is also something of a sore point. Rivals are well ahead of the game, and Morrison's web-based offering pales in comparison. Investment is ongoing in this side of the business.

The majority of stores are owned rather than leased, which means cash flow is strong. That underpins the healthy balance sheet, giving the company breathing space. Longer-term, investors will want to see Morrison protect market share and grow its profit margin, currently just 2.6%.

The group's in the habit of paying out special dividends alongside a growing ordinary, and that means the shares offer a 4.2% prospective yield. Analysts expect the payout to rise over the coming years - although no dividends are guaranteed.

For now, the shares trade on 16 times expected earnings, above the longer-term average of 13.8.

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Full Year Results

Total group revenue rose to £17.7bn in 2018, after adjusting for the extra week in the last financial year this was a 4.7% increase. Excluding fuel, sales rose 5.1%, the strongest rate of growth since 2009/2010.

The number of same store retail transactions grew 0.7%, however the number of items per basket declined 0.9%.

Operating profit, excluding exceptional online and wholesale supply start-up costs, rose 4.5% to £465m. Operating margins, before these exceptional items, increased slightly to 2.6%.

Free cash flow was down 24% to £265m, due to the non-repeat of last year's income from disposals. Ignoring the impact of these proceeds, cash flow increased 6.6%. Net debt increased to £997m.

Customer satisfaction improved once again, with responses to the Morrisons Makes It range proving positive.

Looking ahead, Morrison expects to begin supplying McColl's remaining c.300 convenience stores towards the end of 2019, and is on track to deliver £1bn in wholesale revenues from the arrangement in due course.

The group said future investment will focus on digital, distribution, online and wholesale improvements.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.