LONDON -- Dividend income accounts for about two-thirds of total returns -- the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.
I am currently looking at the dividend prospects of Wm. Morrison Supermarkets and assessing whether the company is an appetizing pick for income investors.
How doesWm. Morrison Supermarkets' dividend history stack up?
FY dividend per share
Source: Wm. Morrison company accounts.
Falling earnings in recent years have caused dividend growth to slow substantially since 2010's mammoth hike -- that year, Morrisons brought its dividend cover in line with the standard for the European retail industry. Still, annual dividend expansion has still remained in chunky double-digit territory during the period.
As well, dividend cover has remained above the widely recognized safety benchmark of two times prospective earnings.
What areWm. Morrison Supermarkets' dividends expected to do?
FY dividend per share
Source: Digital Look.
The prospect of declining earnings is set to weigh further on dividend growth in the medium term, analysts believe, with an earnings-per-share decline of 4% this year expected to push dividend growth into single digits. A projected 4% earnings recovery next year will keep the dividend growing but won't stem the annual expansion decline, while the effect of falling earnings is expected to drag dividend cover onto the two-times security watermark.
Morrisons announced in this month's interims that total sales excluding fuel rose just 0.6% during the first quarter, with like-for-like sales dropping 1.8% during the period. The supermarket has not been able to profit from the much-publicized horsemeat scandal, which has hit rivals such as Tesco , and it continues to lose market share.
In better news, Morrisons announced that it had finally inked an agreement with Ocado to enter the rapidly growing online shopping space, with grocery deliveries due to commence from January next year. In addition, the supermarket is also making headway in the more lucrative convenience-store market and is on track to have 100 of these stores by the close of the year.
How doesWm. Morrison Supermarkets' dividend prospects rate against the competition?
Prospective Dividend Yield
Prospective P/E Ratio
Food and drug retailers
Source: Digital Look.
Morrisons currently trades on a 2013 P/E readout of 11.1, beating both the FTSE 100 and its rivals in the food and drug retailing space, while it also comfortably beats both groups in terms of projected dividend yield.
The metrics are much closer when compared to British supermarket rivals J Sainsbury and Tesco, however. The former trades on a forward P/E of 11.9 and carries a dividend yield of 4.6%, while the latter provides a yield of 4% and trades on an earnings multiple of 11.6.
Despite this, I believe Morrisons lags heavily behind its rivals in terms of overall investment appeal. Sainsbury's continues to display solid momentum in the U.K. grocery space, while juggernaut Tesco's stronger financials and experience provide a better turnaround story than Morrisons. The move to online should improve Morrisons' earnings from next year, but in the meantime falling earnings could weigh on dividend growth.
Multiply your investment income with the Fool
Although I think Wm. Morrison is not an attractive pick for investors at present, there are plenty of other FTSE 100 winners available to really jump-start your investment income. So check out this brand-new and exclusive report covering a multitude of other premium payers right now. Our "5 Dividend Winners To Retire On" wealth report highlights a selection of tasty stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical, and utility plays that we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no obligation.
The article A Closer Look at Wm. Morrison Supermarkets' Dividend Potential originally appeared on Fool.com.
Fool contributor Royston Wild has no position in any stocks mentioned. The Motley Fool recommends Tesco. The Motley Fool owns shares of Tesco. 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.