Morrisons drops as payout on 'continued growth' fails to convince

The Bradford-based grocer will pay a final ordinary dividend of 4.43p to lift the full year ordinary dividend for 2017 up 12.2% compared to the previous year to 6.09p and then up 86% to 10.9p by adding another 4p.

Sales in the 53 weeks to 4 February were up 6% to £17.3bn, with like-for-like sales excluding-fuel and VAT were up 2.8%.

Underlying profits before tax of £374m was up 11%, or 9.5% on a 52-week basis, though operating profit margins were seven basis points worse. Underlying earnings per share were up 12.2% to 12.19p.

Free cash flow of £350m was generated, helping cut debt to £0.97bn from £1.19bn a year before.

"We are confident that a broader, stronger Morrisons will continue to grow," the company said, with chief executive David Potts, who has led the turnaround of the company since joining in 2015, highlighting that 2017 saw it become more competitive against its peers and "increasingly differentiated" for customers.

A move into wholesale contributed 0.4% growth to group LFL sales, rising to 0.8% in the fourth quarter from 0.1% in the first, and is "on track" to exceed £700m by the end of 2018, with directors aiming to top £1bn in due course.

As well as a move into wholesale, Morrisons is adding more in-store services with 160 Doddle parcel pick-ups, 400 shops with Amazon lockers, 150 Timpson dry-cleaning concessions, and now five carpark hand-carwashes and a first tyre-change concession.

Online sales via Morrisons.com were expanded with store-pick services extended into further areas and 'Morrisons at Amazon' expanded into more London and Hertfordshire postcodes, and into new cities, namely Leeds, Birmingham, and Manchester.

Incremental profit of £24m was delivered from wholesale, services, online and from lower interest payments in the year, bringing the total achieved so far to £42m of the Potts' £75-125m target.

Expanding on the reason for the special dividend, Potts and chairman Andrew Higginson said: "We are growing sales and profit, and expect that growth to continue to be meaningful and sustainable in the future. We are generating significant levels of free cash flow, which we also expect to sustain.

"The special dividend reflects our good progress so far and our expectations for continued growth. Looking forward, we will retain a strong and flexible balance sheet. We will be guided each year by the principles of our capital allocation framework in assessing the uses of free cash flow."

Shares in Morrisons, which remains one of the most shorted stocks in the FTSE 100 with around 10% of its shares on short interest, were down 1.4% to 223.2p, having already been down almost 10% from its peaks last summer.

Analyst Neil Wilson at ETX Capital said the market has not been buying into the group’s recent run of form. "There is a sense that this kind of growth will be difficult to maintain, but this has been the argument for some time and has continually been wrong."

He sees a lot of good news in the results, with the continued uplift in LFL sales pointing to "management getting the basics right at a time when the threat from discounters is rising and consumers have endured a long battle with falling real wages" , with sourcing more from the UK than rivals proving a useful advantage.

On wholesale, Wilson says this is a "capital-light growth lever [...] that the market may have overlooked, and may continue to overlook", as is the tie-up with Amazon.

Laith Khalaf at Hargreaves Lansdown agreed that investors should be pleased with the results and the dividend, particularly against a backdrop of such challenging conditions for the sector.

"The supermarket has used its largely British supply chain to keep prices competitive, in a market where the falling pound has increased the cost of imported food. Margins have slipped back a touch, but growing sales have helped bolster the bottom line. However much of Morrison’s bumper growth in profits can actually be attributed to lower finance costs, with net debt being trimmed back to under £1 billion. This is a positive development, though perhaps not quite as inspiring as profit growth derived from improved operational performance."

AJ Bell investment director Russ Mould agreed that a likely reason for the fall in the shares is the fall in operating profit and with all of the PBT uplift coming from lower financial charges stemming from the work put in to reducing the debt pile.

“Lower debt means less risk, and that is a good thing, but investors may want to see earnings from the grocer’s core day-to-day operations rise before they take a view that the company really is seeing off the threat posed by the discounters Aldi and Lidl, let alone more established rivals such as Tesco, Sainsbury and Asda.

“After all, Morrison’s operating margin slipped a little, from 2.9% to 2.7%, to suggest the competition remains as brutal as ever."

But Mould was positive on the company's prospects, with the reduction in debt and the massive pension surplus meaning Morrison’s and its shareholders "can hunker down for a long fight without having to worry about the interest bills it owes to its banks", plus strong asset backing and the dividend covered more than two times by earnings "to suggest the payment is sustainable".