Morrisons scraps special dividend, but sales booming

Our head of markets gives his view on this reassuring set of numbers from the supermarket chain.

Morrisons (LSE:MRW) has been focused on honing its financial health and the positive results are beginning to materialise.

There is little question that the group finds itself in a strong balance sheet position, with its store portfolio 87% freehold, free cash flow of around £300 million and currently running a pension surplus.

In addition, the decision to defer the special dividend is a prudent one, which will allow Morrisons extra flexibility in allocating its cash in these trying times.

By the same token, such cautionary moves on company dividends are likely to become more commonplace over the next few months, with little of the negativity which would normally accompany any reduction of any dividend.

Source: TradingView Past performance is not a guide to future performance

A focus on cost control and productivity initiatives is largely behind this strong performance. Indeed, revenues fell 1.1% over the year, with like-for-like sales down by 0.8%.

Even so, a 27.5% increase in pre-tax profit (44% on a statutory basis) is a welcome result, even if the figure was marginally shy of expectations.

From a strategic standpoint, any improvement at McColl’s (LSE:MCLS) (which the company is confident of delivering) will feed through quickly, while the extended tie-up with Amazon (NASDAQ:AMZN) also underwrites expected growth. 

Supermarkets generally are in the spotlight at the moment, with the business rates deferral announcement boosting the sector today, and Morrisons is already reporting a 5% hike in like-for-like sales in the first six weeks of its new financial year.

At the same time, the cautiously optimistic outlook on early sales applies to the other supermarkets also, it is not a phenomenon peculiar to Morrisons.

At the same time, there may be an element of pulling sales forward, which could impact on revenues later in the year.

Ferocious competition, particularly in the current environment, is likely to heighten and, in the meantime, the company is still lagging its competitors with its online offering, which will become a useful weapon for those that have an established online presence.

The ordinary dividend yield of just 2.2%, now without any special dividend, is not on the list of attractions for the stock at present.

For the most part, however, this is a reassuring set of numbers from Morrisons and the initial reaction to the results will be of some solace to long-suffering investors.

Prior to today, the shares had dropped 18.5% over the last year, although due to the recent broader market plunge, this compares favourably to the FTSE 100 index, which lost 27.5% over the same period. 

The market consensus has, of late, shown a small improvement to a “strong hold”, although the general view remains that even in light of these pleasing results, there remains better value elsewhere in the sector.