Questor: Buy Morrisons in the hope of a dividend treat

Russ Mould 25 October 2016 • 5:17pm

Morrisons sign — Morrisons' chief executive, David Potts, is cutting capital expenditure and costs, sweating the firm’s working capital and paying down debt

The latest numbers on Britain’s grocery industry, from Kantar Worldpanel, show that it remains a tough market. Tesco (whose retail bonds still could interest yield seekers, as Questor’s Income Portfolio column mentioned recently) appeared to do best of the big quoted grocers in the 12 weeks to October 8, with a 1.3pc gain in sales, compared with a 0.4pc drop at Sainsbury’s and a 3pc slide at Morrisons.

However, it was intriguing to see Morrisons’ shares rise on this news. So it may not take much to produce a positive surprise, especially as September’s third-quarter results had already shown a third straight increase in “like-for-like” sales (which disregard the contribution from newly-opened stores).

In addition, the chief executive, David Potts, is still cutting capital expenditure and costs, sweating the firm’s working capital and above all paying down debt. This lowers risk and even leaves scope for small dividend increases.

Morrisons’s market value is £5.3bn. Subtract its cash and investments and add on its debts and the firm has an “enterprise value” of £6.3bn – yet it has property and plant valued at £7.1bn. This suggests that there is value here.

The risk is that the firm, a member of the FTSE 100, suffers further weak trading and has to write down the value of its stores (again). But the valuation already partially factors that in.

The lower the debt goes, the better, as that derisks the business. If Mr Potts hits his cost and working capital goals, Morrisons could start to generate healthy levels of cash flow.

Questor says: Buy

Ticker: MRW

Aveva

Expensive stocks are having a tough time of it right now, as shown by the likes of Unilever and Reckitt Benckiser. Their lofty ratings left no margin for error and the stocks have begun to lose ground as earnings forecasts have ebbed.

Aveva, a specialist in computer-aided design software and is part of the FTSE 250, can hardly be described as a bargain either, on nearly 30 times forward earnings, but the difference is that analysts’ earnings estimates are creeping higher once more.

This may be down to rising oil prices, as the resources industry is one of Aveva’s key target markets alongside power plants and shipbuilding, and also the pound’s plunge, as Aveva makes more than 90pc of its sales overseas.

In addition, Aveva will have a new boss next year when James Kidd replaces long-term chief executive Richard Longdon. After two sets of failed discussions with France’s Schneider Electric under Mr Longdon it will be interesting to see if his successor revives any possible deal. Meanwhile the balance sheet has net cash and dividends are rising.

The lofty valuation means the stock has its risks but stronger oil prices and a weaker pound are both helpful and it will be interesting to see what the new boss brings.

Questor says: Hold

Ticker: AVV

Connect

Spun out of WHSmith and formerly known as Smiths News, Connect’s origins lie in newspaper and book distribution. But select acquisitions are taking the company into new markets such as education, health, freight and parcel delivery – where Asos and Amazon, no less, are both customers. Further purchases are possible as Connect takes its skills into new markets where there are growth opportunities.

Last Tuesday’s full-year results were perfectly solid as sales rose by just under 2pc and underlying pre-tax income by 7pc. Best of all, cash flow jumped by 25pc and management increased the dividend for the ninth straight year.

Analysts expect a further low single-digit increase in profits for the year just begun and another dividend rise, to leave the stock offering a 6.9pc prospective dividend yield.

Growth-obsessed investors may not be too interested, even as the firm repositions itself, but the twice-covered dividend yield may catch the eye of income-hunters.

Questor says: Buy

Ticker: CNCT

Russ Mould is investment director at AJ Bell