This week, we are going to take a look at the retail sector, including the food retailers. The first list is far too long with 40 initial candidates so we will start to apply the DividendMax filters to reduce the size of the list.
A yield over 5% reduces the non food retailers down to a manageable 6 stocks including Halfords, Marks & Spencer, JD Sports Fashion, Rexell, Kingfisher and Home Retail. On the food side we are reduced to Sainsbury, William Morrison, Tesco, Greggs, Ahold and Delhaize.
One of the things that I have noticed since DividendMax started to cover international stocks is the sheer scale of UK dividend payments. We really are spoiled. In the U.S, which is supposed to be the most efficient capital market in the world, yields are much lower and so it proves again this week, with no U.S stocks making it through the yield criteria.
This, in spite of 12 U.S. stocks in the initial list. In case you are interested McDonalds topped the food retailers and Staples, the non-food retailers in the U.S.
The next criteria that we will adopt is that there will be a dividend increase next year and this drops Delhaize from the food retailers.
Halfords, Rexel and Home Retail are dropped from the non food retailers. All of the food retailers have a CADI (consecutive annual dividend increases) of greater than 5 and all have dividend cover around 2.
Marks & Spencer drops from the non-food list having posted no increase last year with minimal, if any increase expected this year. So lets have a look at what our survivors have done this year:
| Non-Food | 52 week High | 52 week low | Current price | P/E Ratio |
|---|---|---|---|---|
| Kingfisher | 314p | 254p | 275p | 12.4 |
| JD Sports | 863p | 612p | 756p | 8.5 |
| Food | 52 week High | 52 week low | Current price | P/E Ratio |
| Tesco | 360p | 297p | 360p | 11.4 |
| WM Morrison | 305p | 251p | 252p | 9.4 |
| Greggs | 558p | 449p | 481p | 12.2 |
| Ahold | 1105c | 904c | 1065c | 11.5 |
To my mind there are two standout purchases, one from each sector. There is no way that Tesco with it’s well documented issues merits a 21% premium over William Morrison, which also has a higher yield and a higher forecast dividend increase.
Greggs, whilst a good business, to me, does not carry the defensive qualities of a supermarket stock and Ahold also does not merit a premium over William Morrison and carries a lower dividend.
Morrisons has been hit by a fairly poor trading statement in January, but still expects profits to be in line with market expectations. It is buying back its own shares at these levels and this should drive earnings growth to some extent. With an annualised yield of 6.65%, the share buyback, strong dividend cover and its 21% discount to Tesco, William Morrison is the pick of the food retailers.
On the non food side, I like Kingfisher, but JD Sports Fashion represents outstanding value on a P/E of 8.5.
It has a superb track record of increasing it’s dividend, has cover of 3.3x, but yields a full percentage point less than Morrisons. In its recent trading statement, the core business has performed well, but buying Blacks and Millets from the receiver is a short term drag on profits.
As is often the case, the short term outlook dominates, but investors need to recognise that JD has excellent management and I expect a solid turnaround in the outdoor businesses over the next two years.
It is a very difficult call between the two, but on balance, with its defensive qualities, higher yield and deep discount to the sector, the share buyback and the fact that it is trading at its 52 week low, William Morrison is dividend of the week. Keep an eye on JD though.
