WM Morrison: A Contrarian view

Like a great sail-driven trading ship in mounting seas without a chief officer (The new CEO David Potts is rowed aboard next week) but a busy financial navigator officer (suitably Named as Mr. Strain) keeping the ship sea worthy, William Morrison Plc (MRW) has docked its results for last year.

In my judgement they look, on balance, positive and encouraging. Much of the results is within the guidance given by the management last March. But first a word about the dividend position. The company has made this as intriguing as possible by first raising the 2014 dividend by 5% but stating that it will pay at least 5p per share in annual dividend next year in a nice combination of psychology and underwriting. The paying an extra 5% for 2014 sends a message of the management’s  commitment to dividends as a means of rewarding shareholders whilst at the same time giving itself flexibility for this year.

At 205p – the share price last seen – is on a minimum prospective dividend yield of 2% against the current annual dividend yield of 3.4% on the FTSE 100 Index.  However, meanwhile, the share remains an attractive, above average dividend play, because the final dividend for last year of 9.62p – a dividend yield of almost 4.7% on that one payment – will be paid to shareholders on the share register on the 8th of May.

One may reasonably expect that income funds will be buying the shares for that income whilst perhaps short term funds may well decide to take a quick capital gain after a sixth month period in which the share price rose 15%, visibly beating the FTSE 100 Index as it did so.

In terms of pure and simple logic, longer term investors will not seek to sell the shares unless they think the share price will fall by much more than 4.75% (i.e. the value of the dividend). That would take the share price down to 195p where it would then be on a prospective minimum dividend yield of 2.56%. Interestingly, the share price chart suggests that there is potential share price support at around 185p, some 10% below the current share price – last seen – of 205p. At 185p, the prospective dividend yield based on 5p would be 2.7%. It is to be noted that the share price has been on an upward trend since last October.

Turning to the trading results, I list the things I think encouraging:

1. First, sales revenue was down 4.9% and like for like sales down 5.9%. Like for like sales showed an improving trend, quarter by quarter, throughout the year. They were reported down 5.0% in Q2 but only down 1.9% in Q4, the most important quarter.
2. Second, there was an improvement in cash flow. Free cash flow before payment of the dividend and the impact of property sales rose by £63 million – 8.7% – to £785 million. That was despite a 53% reported decline in underlying earnings per share to 10.9p.
3. Three, working capital rose by £206 million.
4. Four, Property disposals raised proceeds of £477 million on which there was a profit of £133 million.
5. Five, net debt was reduced from £2.8 billion to 2.3 billion.
6. Six, the pension scheme obligations were reported as 97% funded with a deficit of only £44 million at 1.3% of total long term liabilities.
7. Seven, the company owns much of the property it uses – hence the massive impairment charge.
8. Finally, much of the results seemed to be in line with management guidance last month, strongly attesting to the reliability and good execution of the management.

My conclusions are that the management will deliver robust cash generation over the next year or so, along with significant cost savings. The share price has bottomed and is trending upwards. Short term, after the strong performance of the share price in the last six months, it has room to come back a bit, possibly finding trend support at around 185p.

It is my personal judgement that the management did a good job in the year to 1st of February 2015. Despite the big write down of property values, I estimate the balance sheet equity asset value at about 153p a share; three quarters of the share price of 205p. Long term, therefore, the shares have investment attractions in my opinion. Short term, the market consensus is for earnings growth of 14% this year and 18% next year, putting the shares on a forward estimated PER of 15.8 times this year and 14 times next with an estimated dividend yield of 3.6% for 2015-2016.