Morrisons tipped to deliver strong profit growth

There's further buying of Morrisons shares after this confident update. An attractive dividend helps. 

With many other sectors coming up against soft comparatives a year on from the height of the pandemic, for the supermarkets the opposite is true.

Despite fulfilling their basic task of feeding the nation, this came with large associated costs relating to Covid-19 store replanning and staff costs, meaning that the home run which many had envisaged did not materialise.

For Morrisons (LSE:MRW), the crisis provided an opportunity to ramp up an online offering which was far behind that of its rivals, and while a gap remains, an increase in first-quarter sales of 113% is evidence of the progress which has been made. In addition, the spike in wholesale sales of 21% is further vindication of the McColl’s (LSE:MCLS) tie-up, while in the background an evolving relationship with Amazon (NASDAQ:AMZN) could provide some fascinating prospects.

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Meanwhile, Morrisons remains in good shape financially. Its guidance on net debt is unchanged, and its cash generative ability to reduce this number is also underpinned by a largely freehold store portfolio.

As such, the group has been able also to confirm its outlook for full-year profit to exceed the £431 million it would have achieved last year, excluding the waived business relief of £230 million. It plans to provide further details on its capital policy at its interims in September, but in the meantime investors are being paid to wait with a current dividend yield of around 4%.

There have also been some notable early successes from the gradual easing of lockdown, with fuel sales close to pre-pandemic levels, and with an increase in sales of food to go products positioning the group well for the coming months. Alongside a sharp decrease in relative Covid-19 direct costs, the door will be open to greater overall profits.

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The supermarket sector is notoriously competitive, especially on price, but Morrisons has made strides during the pandemic to refresh both its products and, indeed, its image. It remains to be seen whether this improvement is a permanent one as the return to normality unfolds, but for the moment the potential is evident.

Unfortunately, this has not been reflected in a share price which has declined by 2% over the last year, including demotion from the FTSE 100 index in March this year, and which compares with a jump of 39% for the wider FTSE 250. More positively, sentiment towards the company has recently improved on renewed prospects, with the market consensus having edged up to a 'buy'.