Morrisons (MRW) share price forecast amid tough competition
17:08, 23 April 2021
The past two-and-a-half years have not been too kind to WM Morrisons. The company has faced tough competition from online rivals such as Ocado, which has depressed its growth prospects and, as a result, its valuation.
With net debt of around £3bn ($4.1bn, €3.4bn) and a market capitalisation of £4.35bn ($6bn, €5bn) the company is trading at basically its book value.
That said, consumers are increasingly relying on the internet to shop for groceries. So can Morrisons come up with a value proposition that’s strong enough to reverse the current downtrend?
In the following Morrisons share price forecast, I’ll be taking a closer look at the stock’s fundamentals and technical set-up to see if there are opportunities ahead for this retailing giant and whether it will have the ability to maintain its attractive dividend yield or not.
Morrisons share price news
After slashing its dividend strongly during the 2015/2016 fiscal year, Morrisons has managed to keep expanding its distributions from 5p per share back then to 11.15p per share at the end of its 2020/2021 fiscal year.
This results in a compounded annual growth rate of 17.4% while the current dividend yield stands at 6.15% based on last year’s distribution and yesterday’s closing price of 180p per share.
This attractive yield makes the stock an interesting fixed-income play. However, investors should proceed with caution as above-average dividend yields often reflect that the business might be unable to live up to its expectations in the near future.
According to Morrisons’ financial statements covering its 2020/2021 fiscal year, the company’s free cash flows took a strong hit as a result of lower profit margins. This situation ended up depressing the firm’s net income after tax from £348m in 2019/2020 to £96m by the end of this last fiscal year.
As a result, dividend coverage slipped quite dangerously as the company’s free cash flow turned negative compared to £350m in FCFs the company brought the year before – which barely covered its dividend obligation for the period.
Moreover, Morrisons’ inventories increased from £660m in 2019/2020 to £814m last year – a situation that contributed to depress the firm’s cash generation capacity.
According to the management team, next year should be much better for the firm’s bottom line. It expects operating profits to be above £430m while also anticipating “stronger free cash flow”.
Although the tone of this guidance is particularly positive, it does not erase the concern that the company’s dividend could be slashed if the financial results fail to meet these optimistic expectations.
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Morrisons (MRW) share price forecast
The first aspect I would like to mention is that Morrison’s dividend doesn’t feel too safe based on the firm’s past performance.
At this point, much of that safety will depend on the company’s ability to increase its profit margins back to where they were before the pandemic at least while accelerating its inventory turnover rates above 24.
Aside from that, it is important to note that Morrisons’ profits have been too volatile in the past 10 years at least. In the midst of that volatility, although it is hard to identify a trend, the direction seems either neutral or mildly bearish.
Moreover, when it comes to inventories, the level of inventory reported by the firm by the end of its fiscal year was the highest in seven years.
For the foreseeable future, as long as the company manages to produce more than £750m in cash from operations while keeping its capital expenditures below £450m chances are that the dividend will either remain as is or it will be mildly expanded.
Given the fact that the management has managed to do that in the past five years at least, I don’t see a worrying deterioration of the fundamentals that could lead to a reduction in the firm’s distribution, much less a suspension.
This view appears to be shared by market participants as well, as analysts have predicted an EBITDA of £1.14bn for the company for its 2021/2022 fiscal year.
On the other hand, as for the potential of price appreciation, estimates see Morrisons’ earnings growing at a rate of 7% per year. That results in a PEG ratio of 1.8, which doesn’t really make this stock an appealing one from the perspective of potential upside in its price.
However, if we add up last year’s dividend, the valuation seems fair as the PEG would fall to 1.
Morrisons shares: buy or sell?
The average WM Morrison Supermarkets share forecast from the six analysts surveyed by MarketBeat see the stock landing at 197p over the next 12 months, which represents a 9.4% upside potential based on yesterday’s closing price.
Notably, the stock was rated a sell by Goldman Sachs with a price target of 175p per share in January last year, which is close to the current price. However, the American investment bank took the opposite side of the court in November last year as it moved its recommendation from Sell to Buy. Possibly since the company looks attractive now that it has hit its previous target.
On the other hand, more recently, two analysts have taken action including Berenberg Bank, which maintained its buy rating but lowered its MRW stock price prediction to 202p per share in February this year.
In total, half of the analysts covering the stock are bullish while the rest are either bearish or neutral.
According to Financial Times, we can see that 12 analysts offer the median price target for Morrisons stock at 201p within the next 12 months, which represents a 10.87% increase from its previous closing price of 181.30p.
FAQ
Is WM Morrison Supermarkets a good dividend stock?
Based on an analysis of the firm’s past performance it appears that WM Morrison has managed to maintain its operating cash flow and capital expenditures at levels that have sustained its dividend growth in the past five years at least.
In this regard, based on the management’s guidance provided during the latest earnings call, one can expect that the dividend will either remain as is by the end of this year or will slightly increase.
Will MRW stock price go up in 2021?
Analysts, surveyed by Financial Times, share a mixed sentiment regarding the Morrisons price appreciation. However, Morrisons’ dividend is quite appealing and the dividend seems safe as long as the business performs similarly to pre-pandemic years.
Will MRW stock price hit 200p in 2021?
Nobody can predict with 100% accuracy what is going to happen with a stock in the next two hours or two months. The best we can do is analyse the business’s fundamentals and the technical set-up seen in the price action to see if the market might be under or overvaluing certain security to take a long or short position accordingly.
For Morrisons, the dividend narrative seems to be dominating the price action for now. Meanwhile, from a fundamental analysis perspective, the stock seems fairly valued based on the market’s expected earnings growth and annual dividend.
If the actual results of any of those two variables is different from what the market expects, chances are that the price will react quite strongly in any direction depending on the nature of the deviation (positive or negative).
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