Our latest research 24/3/2014

DividendMax Ltd.

Our latest research 24/3/2014

DividendMax write up 24/3/2014

Today we are going to look in the Optimizer at the troubled food retailing sector. We do not need to use the tool for initial selection as this sector contains only fourteen stocks covered by DividendMax. The global nature of DividendMax will enable us to compare across a number of companies in numerous countries. Our long list is Morrisons Supermarkets, Sainsbury’s, Tesco, Greggs, Ahold, Delhaize, McDonalds, Carrefour, Distribuidora Internacional de Alimentos, Booker, Colruyt, Wal-mart, Starbucks and Whole Foods market Inc. By selecting an annualised yield of over 4%, we eliminate the final eight in our list which leaves us with the first six. We will throw in Carrefour and Wal-Mart to increase our comparison because it is the Supermarket groups that we are most interested in.

Looking at the fundamentals we have:

Company

Forward P/E Ratio

Dividend Cover

Annualised yield

Morrison Supermarkets

11.7x

1.5

9.61%

Sainsbury’s

9.6x

1.8

8.76%

Tesco

9.7x

2.0

8.29%

Greggs

15.4x

1.7

6.27%

Ahold

16.5x

2.3

5.28%

Delhaize

12.1x

2.7

4.36%

Carrefour

20.6x

2.2

3.72%

Wal-Mart

15.0x

2.8

2.73%

Looking at the list we believe that the low P/E ratios and very substantial yields of the big three U.K. supermarket groups merit further investigation. We think that the high-ish P/E and low cover of Greggs is too challenging and the P/E is also too high for Ahold, Carrefour and Wal-Mart with them all on 50% plus premiums to their U.K. counterparts, whilst delivering very much lower yield. Delhaize merits further investigation and will go through to the next stage of our analysis. Before we investigate further we will have a look at what the brokers are saying about our survivors:

Company

Buy

Hold

Sell

Morrisons

5

7

9

Sainsbury’s

7

10

3

Tesco

5

8

6

Delhaize

10

10

4

We see having a food retailer in your portfolio as essential and we would like to pick one out for DividendMax subscribers, but first a comment on the way analysts tend to work. It has always amazed me and some of the very successful stock market traders that I know how reactive investment analysts tend to be. They are paid very large sums of money, but they very rarely tell you to sell something before the ‘**** hits the fan’ or indeed tell you to buy something until the P/E looks a little eye watering and the stock has already performed very well. In other words, what we are saying is that they have a tendency to say Buy when it’s high and sell when it’s low. At DividendMax we like to be proactive and that is why we think that the U.K. food retailers represent very good value at these levels.

Firstly, lets remind ourselves of the dividend histories of our four survivors. In the final analysis, at this early stage of their recovery, the dividend is going to be the main fundamental supporting the share price. Let’s have a look at the dividends paid by each company over the past 6/7 years:

Morrison (wm) Supermarkets

Year

Dividend in Pence

% Growth

2006

4.00

 

2007

4.80

20.0%

2008

5.80

20.8%

2009

8.20

41.4%

2010

9.60

17.1%

2011

10.7

11.5%

2012

11.8

10.3%

2013*

13.0

10.2%

*they have declared a final dividend of 9.16p for 2013 going ex on 7th May 2014.

Tesco

Year

Dividend in Pence

% Growth

2006

9.64p

 

2007

10.9p

13.1%

2008

11.96p

9.7%

2009

13.05p

9.1%

2010

14.46p

10.8%

2011

14.76p

2.1%

2012

14.76p

0.0%

2013*

15.13p

2.5%

*We are estimating a final dividend of 10.5p for 2013.

Sainsbury’s

Year

Dividend in Pence

% Growth

2006

9.75

 

2007

12.00

23.10%

2008

13.20

10.00%

2009

14.20

7.60%

2010

15.10

6.30%

2011

16.10

6.60%

2012

16.70

3.70%

2013*

17.50

4.80%

*We are estimating a 2013 final dividend of 12.50p

Delhaize

Year

Dividend in euro cents

% Growth

2006

132.00

 

2007

144.00

9.10%

2008

148.00

2.80%

2009

160.00

8.10%

2010

172.00

7.50%

2011

176.00

2.30%

2012

140.00

(20.50)%

2013*

149.00

6.40%

*We are estimating a full year dividend of 149 cents for 2013.

Four track records that show just how tough the recession has been, not just in the UK, but also across Europe. We are going to eliminate Delhaize at this stage as they are the only one of the four to have actually reduced their dividend during the period by 20.5% in 2012.

One of the things that strikes me about this and I think it should serve as a lesson to investors is that as we entered the recession, Food retailers were perceived by many as being defensive stocks and the figures clearly show that they have suffered probably more than most with the mining and natural resource sector being the biggest loser. We believe that as a result of the current economic environment improving all three of the big supermarket groups will stage major recoveries over the coming leg of the economic cycle.

Morrisons Supermarkets recently produced their final numbers and the market was disappointed marking the shares down to a 5 year low. They stated that they will pay a full year dividend for the next financial year of ‘at least 13.65p’ with a progressive policy after that which will be lower than in recent years as dividend cover needs to be rebuilt to a more normal level of around 2 times. Whilst we agree that this is slightly disappointing, it makes perfect sense and with a really strong balance sheet and a major restructuring of the business well underway, they should be providing decent dividend increases again from 2016 onwards.

Tesco have had a well-documented torrid time of it over the past few years. It is currently being run by a guy who was in the year above me at school, so I like to keep an eye on it. Unfortunately he was the one who ended their proud record of over 25 years of consecutive dividend increases. (Something that is quite rare in the UK, but less so in the US where cover is generally higher) Unlike Delhaize however, the Tesco dividend has been maintained. Chances are that it will only be maintained this year, but we are going for a very small increase and the expectation that the company has done it as a sign of confidence in the business over the coming years. Our friends the analysts have pencilled in flat profits for the years ending 28th February 2015 and February 2016. We think that this is over pessimistic. If the economy is picking up and unemployment is falling rapidly and earnings start to rise, people will soon give up on Aldi and Lidl and go back to the big three. That said, we do concur with them that the next 12 months will be a tough and competitive environment.

Sainsbury, like the other two sits near to its 52 week low, although it is above its 5 year low, but not by very much. As with Tesco, the analysts have pencilled in flat profits for the years ahead. In their recent trading statement, they indicated that they had maintained their market share. They also look the most likely of the three to continue with decent dividend increases. Morrisons have the best dividend track record in recent times, but they must rebuild their cover.

It is a very close call between the three stocks, but for its outperformance of its peers, we are going to go with Sainsbury. In general we believe the sector to be undervalued and we see no prospect of dividend cuts or reductions at any of the three companies. The high yields will put a floor under the sector and from these levels downside is very limited.

We are estimating the next three dividends to be 12.5p, 5.3p and 13.1p. They are at 310p today. At 310p, this will generate a return of 8.76% annualised over a 14 month period.

Sainsburys yield calculation:

12.5 + 5.3 + 13.1 = 30.9p between now and 13/5/2015 (approximate ex-dividend date of the third dividend)

Ergo 30.9p / 310 = 9.96% 9.96% annualised = (9.96x365) / 415* = 8.76%

*Number of days until theoretical ex-dividend of the third dividend.

Note that if the dividend forecasts are correct, the actual yield (which DividendMax calls the ‘Optimized yield) is affected by two factors; the share price and the proximity to ex-dividend dates. DividendMax performs these calculations daily against hundreds of stocks in the U.K. and overseas producing new lists every day as prices change, dividends change and ex-dividend dates approach. 

Companies mentioned