Tesco / Sainsbury's / Morrisons
The top 3 supermarkets in the UK have all lost significant value in their share prices over the last few weeks. I want to review if there's an opportunity to capitalise on their low price.
Warren Buffet believes in being greedy when others are fearful. Despite them all losing value on their share price, they have still managed to payout dividends of over 4%. So, is there value to be had in the UK supermarkets? Is it time to get 'greedy'? Lets take a closer look:
They are still viewed by many as the king of retail in the UK. They also have an edge on their 2 rivals with growing presence in South Korea, Thailand, Poland, Hungary, and the Czech Republic.
According the www.Fool.co.uk, The company is also nurturing its presence in China, Turkey, Malaysia, and Slovakia with each market offering meaningful growth opportunities, well above what is available at here in the UK.
Tesco have felt the pinch in the UK with their rivals, and their share price has plummeted 22% in the last 6 months.
They produced a dividend yield of 4.0% in 2013. They have averaged a stable 3.78% yield over the last 5 years. However, they've declared the same interim dividend payment in 2014 as the previous 2 years. Which isn't the type of consistency dividend growth investors are looking for. However, over the last 5 years, their dividend growth has still managed to average 6.4%. Will their dividend continue to stagnate or grow to the levels of 3 years ago and beyond?
Their dividend cover has remained very stable over the last 5 years ranging from 2.43 up to 2.73.
They recently announced this week that their 9 year run of continuous sale growth ended in the final quarter of the last year. Their CEO resigned at the end of January 2014, and to many their sales growth results were due to come to an end.
Their falling share price (22% in 6 months) has driven up its dividend yield, but the companies finance costs have been covered 7.5 times by their operating profits over the last 12 months. This might suggest that the dividends remain safe.
They produced a dividend yield of 4.6% for 2013, and have averaged a yield of 4.54 over the last 5 years, which is very welcoming for share holders (The highest 5 yr average of the top 3).
Their dividend has continued to grow over the last 5 years. It has reduced steadily from 10% growth in 2009 to 3.73% in 2013. It's averaged 6.85% over the course of 5 years, which is over the 6% growth that I look for.
The dividend cover is the lowest of the top 3, but this has increased over the last 5 years from 1.61 in 2009 to 1.84 in 2013, which again is over the 1.5 I look for in dividend growth shares.
They had a great year in 2012 with a pre-tax profit of £879m. Unfortunately 2013 wasn't as fruitful, and they ended with a pre-tax loss of £176m. This has contributed towards their share price lowering 27% in the last 6 months (the biggest decline of the top 3).
The good news is that currently, the share price has not impacted their dividend payments. They have remained very healthy for the last 5 years. They produced a dividend yield of 4.7% in 2013, and they've declared a 5.4% yield for 2014, which is very respectful.
They have increased their dividends every year for the last 5 years from 2.8% in 2010, to 5.3% in 2014. The average yield over the 5 years is 4.04%.
The dividend growth rate has been in double figures over that same space of time, with 2014 producing the lowest increase at 10.17%. This double digit growth rate is much sought after by fellow dividend growth investors.
Their dividend cover has decreased over the last 5 years from 2.5 down to 1.94 for 2014.
I've read articles on all three companies where people recommend buying them, whilst others are suggesting to stay away from them for time being. When I review each of the companies figures, and compare the three, I can see a good argument for picking any one of the them.
Tesco's lack of dividend growth, and current dividend payout is less than it's competitors. Conversely, it's shown more stability over the long term, it has a dominant market share position, strong cash flow, and is backed by a current property portfolio valued at £37bn.
Sainsbury's has the highest average dividend yield over 5 years, and has shown steady dividend growth. However, analysts at Goldman Sachs believe that Sainsbury's is "ex-growth", has the weakest balance sheet of the top 3, and values the stock at half of it's current rate today (21st March 14).
Morrison's has the highest dividend growth rate over 5 years (over 10%), a yield over 5% for 2014, and a dividend cover of 1.94. They tick 3 key boxes for me. Morrison's do have a net debt forecast of £2.7bn, and they are looking to sell some of their property to raise £1bn to cover this.
I'm still currently undecided on which supermarket to buy shares in. I think there's a great opportunity for me to benefit from a long-term investment of a top blue chip company, on the cheap. I just need to decide which one?
Thank you for reading, and wish me luck with my decision!
Have you recently invested in the cut price supermarkets? Which supermarket appeals to you more at present?
Labels: Share Watch, Strategy