Should You Buy Wm. Morrison Supermarkets?


LONDON -- I believe investors should steer clear of Wm. Morrison Supermarkets , as the prospect of mediocre earnings growth in an already challenging environment for Britain's grocery chains threatens to send the company's shares lower.

Despite plowing more than 1 billion pounds into the business over the past year, Morrison continues to lose ground against its main competitors. And a lack of near-term price catalysts is exacerbated by the ongoing struggles experienced in the U.K.'s retail sector.

Market share continues to crumble
Retail research specialists Nielsen noted in its most recent report that Morrison's fortunes have continued to slide into 2013. The consultancy estimates that the supermarket's sales dropped 2.8% in the four weeks to Feb. 1, with like-for-like sales down around 5% in financial terms and substantially more in volume terms.

And the chain's market share continues to head lower, ringing in at 10.6% during January vs. 11.2% during November. Indeed, Morrison's market share is down 0.8% from the same point in 2012.

Expect earnings to remain under pressure
Morrison's earnings per share are projected to rise just 4% to 26 pence for the year ending Jan. 2013, according to City analysts. Earnings per share are then expected to remain flat in 2014 before edging 4% higher to 27 pence the following year.

The grocer trades on a sub-10 P/E ratio, and a reading of 9.8 for this year and next is predicted to fall to 9.4 in 2015. But such a lowly price rating is to be expected, given the deteriorating data are pointing toward further earnings pressure -- and the potential for further downgrades -- sooner rather than later.

Decent dividends lighten earnings stagnation
A redeeming feature of the supermarket chain is its plump dividend policy. Analysts predict a dividend yield of 4.5% for 2013, which is anticipated to rise to 4.8% and 5.1% in 2014 and 2015 respectively.

Decent dividend cover also provides income investors some with peace of mind, a critical factor given significant fears over future earnings growth. A forecast dividend of 12.7 pence and 13.3 pence per share for 2014 and 2015 are covered 2.1 times for both of the next two years.

The expert view on optimizing returns
Still, I believe that investors should keep Morrison on the shelf while revenue projections remain bleak. There is a wide selection of other stock opportunities on offer, boasting both solid earnings growth and dividend payment, which should be attracting investors' attention instead.

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Royston Wild does not own shares in Wm. Morrison Supermarkets, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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