Morrisons unveils new dividend policy as results show slow turnaround

Overseeing his first set of preliminary results at the grocer, chief executive David Potts unveiled a new dividend policy thanks to an improved outlook for medium-term free cash flow and cost cuts, though he cautioned that the turnaround of the supermarket group "will take time and sustained investment".

For the year to 31 January, total revenue was down 4.1% to £16.1bn, with the LFL sales improvement in the second half of the year seeing a 2.6% decline in the third quarter segue into a 0.1% rise in the fourth, despite deflation of over 3%.

Sales were hit by the sale of most of its convenience stores in September, but rising transaction numbers over the year show customers are coming back to the stores.

Underlying profit before tax, before including £60m head-office and store closure costs, was down 27% to £302m, roughly the mid-point of the £295m-£310m range to which Potts had guided. Underlying earnings per share slid 28% to 7.8p.

Statutory profit before tax was £217m up from the previous year's loss of £792m.

A final dividend of 3.50p was declared, giving a full year total of 5p, down two-thirds from last year.

From 2016/17, the new dividend policy will see the payout covered around two times by underlying earnings per share, which the board felt "aligns shareholder returns with the long-term performance of the company".

Free cash flow is now expected to be at least £300m better than first guided in the medium-term, thanks to improved expectations for operating working capital improvement of at least £800m - up from £600m previously - and property disposal proceeds at least £1.1bn - up from £1bn. Cash generation is easier for Morrisons than some competitors as 85% of its sites are freeholds.

Potts added that the "journey" to turnaround the business had begun thanks to a "listening programme" that had led to an improved shopping trip for customers.

Behind the scenes he added that the new financial year would see the remainder of the £1bn three-year cost savings made, "but the turnaround will take time and will continue to require sustained investment in the proposition".

In the medium-term, Morrisons now expects £50m-£100m incremental underlying PBT from opportunities identified in online, manufacturing, wholesale, popular and useful services, and from lower interest costs.

After cutting net debt by £594m in the year to £1.75bn, with the stronger cash flows and new dividend policy the coming year a target range of £1.4bn-£1.5bn has been set.

Shares in Morrisons, recently lifted above 200p thanks to the Amazon wholesale deal, fell back 2% to 197.9p not long before noon on Thursday.

Analyst opinions

Analysts Steve Clayton at Hargreaves Lansdown said that while it was still a work in progress, Morrison appeared to be heading in the right direction, agreeing with Potts' strategic plans to focus on the consumer with price competitiveness and improved store appeal.

"There is however no sign of an end to deflation in food pricing; Morrison is firmly in the sights of Aldi and Lidl and if it is to repel their threat, its value focus must be relentless. But debts are falling as the group focuses on cash, and Morrison's financial position looks secure enough," he said.

"Morrison has potential but it still faces many challenges, not least the absence of a convenience offer of any scale, and being seriously behind the curve in its online offering. On the latter point, the company plans to further expand their relationship with Ocado and will also be providing wholesale supplies of produce to the Amazon Pantry service.

John Ibbotson of retail consultants Retail Vision agreed Potts was doing a good job, but found it hard to believe the struggling grocer was entering a new era, with the Amazon deal not enough to make up for ongoing structural sales and profit declines resulting from the rise of the discounters.

"The elephant in the room is ASDA, which overlaps the most with Morrisons in the north. Bankrolled by Walmart and implementing Project Renewal, ASDA will become a superstore with discounter prices and is set to pose the biggest threat to Morrisons in the months and years ahead."

Ibbotson added: "Morrisons may be back in the FTSE 100 and it may have teamed up with Amazon, but many will argue its core business is still mutton dressed as lamb."

Clive Black and Darren Shirley at house broker Shore Capital noted that while management are currently focused primarily upon 'fixing' the business, they expect increased attention to 'rebuilding' and 'growth' before long.

"Aspirations in the latter domain are not pipe dreams a view reflected in the capital light new business opportunities which include the recently announced wholesale agreement to supply Amazon with groceries and the trial of Morrisons Daily with the Motor Fuel Group."

Furthermore, they added that the ongoing de-leverage will allow for more direct benefits to shareholders to accrue too, which the company directly addresses in its statement: "Free cash flow generation and liquidity will remain strong and net debt will continue to fall which will enable flexibility and choices around re-investment and shareholder returns."

For the new financial year ShoreCap is keeping its forecasts for £330m PBT and 10.6p EPS, though "there may be scope for this to be positively re-appraised down the line".