Morrisions signals 2015 dividend cut after profits halve Shares open 1

Shares in supermarket chain Morrisons – the UK’s fourth largest grocer – reported a 5.9% drop in sales for its full year 2014 and moved to reduce dividend payouts to shareholders next year after seeing its pre-tax profit fall by 52%.

That profit fall was however broadly in line with previous guidance ranges.

Summary of earnings:

• Underlying profit before tax -52% to £345m (from £719m)

• Like for like sales -5.9% (from -2.9%) – note that this is excluding fuel and VAT

• Total turnover -4.9% to £16.8bn (from £17.7bn)

• Final dividend payment of 9.62p

• Total dividend +5% to 13.65p (from 13p)

• Net debt reduced by £477m to £2.34bn

• Property impairment taken of £1.27bn due to ‘market conditions’

No corner turned yet. Tough road ahead for its new CEO

The pre-tax profit of £345m falls in line with most analyst expectations of around £340m-£348m and so there is no real negative surprise in the underlying profit number. This does however represent a third year of consecutive declines in profits and clearly the supermarket firm has not turned the corner yet.

Last year the firm said it would spend £1bn to drive price cuts as it aggressively joined the price war with Aldi, Lidl, Asda and Tesco in an effort to drive lost footfall to its stores. It remains to be see whether this strategy is starting to have an impact yet. It does however confirm that during the period it made £224m in cost saving initiatives and remains confident that its £1bn three-year turnaround plan remains on track.

It also took a large hit to its property valuation, which was expected given market trends but perhaps the size of which was a surprise, at £1.3bn.

The firms new CEO, David Potts, who replaced previous chief Dalton Phillips in January, starts in his new role at the firm on 16th March.

Morrisons confirmed it was comfortable with analysts range for 2015-16 profit of £387m, which gives it little breathing room to curtail the fall in yearly profits,

Signals dividend cut for 2015

In the firms outlook for the next year, Morrisons said it expected its dividend to not be less than 5p a share, which it says reflects ‘flexibility around cash flow to enable the investment needed to build trading momentum.’

That is a clear signal to me that shareholders shouldn’t be expected a dividend payment around the same 13p levels it received this last year.

It makes complete sense too. It shouldn’t be paying a healthy sized dividend to shareholders when its reported falling profits for three years in a row and needs to invest a huge amount to help turn the tide. Its much more appropriate for the firm to keep cash flow spare when it needs it and not commit too early to a large return to shareholders when the underlying picture remains volatile. And a quick look at free cash left after its dividend payment (short of £50m) paints a clear picture why it cannot justify payouts at the levels shareholders received these past two years.

The grocery sector remains in a structural decline, sapped by deflation in food prices and a continued move to convenience shopping, where consumers shop more often but in lesser volume. The large supermarket chains such as Tesco, Morrisons and Asda have failed to react to this change quickly enough. Its going to be a tough year for Morrisons.

Shares opened higher but quickly gave way to selling pressure (see chart below)