Last updated: September 17, 2019
Topic: BusinessCompany
Sample donated:

Founded in Bradford over a century ago, Morrisons Supermarkets have grown from a small shop to being the fourth biggest food retailer with stores across the UK following the acquisition of Safeway in 2006. Having achieved a market share of approximately 12%, the company’s main UK-listed competitors include Sainsbury’s, ASDA and Tesco, the latter leading the industry by far with a remarkable market share close to 30%. In this light, Tesco and Sainsbury will be the two companies of choice for analysis and comparison throughout this report, as well as the grocery store industry.

Although Morrisons is not the largest, it could offer a promising investment in the food retail industry as it is in a comfortable position, with high cash inflow, low debt and ownership of most of its stores. It will also be interesting to identify the benefits and disadvantages of an investment in Morrisons in comparison to such a big competitor as Tesco, where allegedly one in every three pounds used on food is spent. However, different companies in the food retail have different strategies, as Morrisons focuses on being a food specialist, Tesco is highly reliant on technology and non-food sales.

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This offers investors a various choice as each model may have its own benefits (i. e. Technology sales may be more profitable, however, specialising on producing own quality food products may not only attract customers and customer loyalty, but also provide more comfort during a financial crisis). When considering an investment in the food retail sector, it is also important to take into consideration the future of a company and that of its competitors. Whereas some argue that Tesco may have reached an expansion peak within the UK, Morrisons is in the position where Tesco was a decade ago.

It has a lot of ground for expansion and diversification, and the announcement that they will experiment with online shopping and open three new convenience stores, describes that they are doing just that. These and other factors raise doubts as to whether Morrisons provides a good investment opportunity or if its uncertain future should scare away investors towards a safer choice such as Tesco. Although the future cannot be predicted, the financial analysis provides one with essential tools for assessing a future investment.

To begin, the analysis we will focus on the shareholders point of view and in order to do that our main point of interest throughout the report will be a small number of profitability and investment ratios. Profitability ratios provide an insight into the main purpose of business success, which is considered in the wealth it creates for its owners and shareholders. To evaluate profitability the first that should be analysed is the return on capital employed ratio, which can help measure the business performance. The ROCE showed a performance of 13. 98%, 14. 49% and 17. 4% for the years 2008, 2009, and 2010 respectfully. The calculated ROCE reflects the industry’s average and has a positive trend throughout the years analyzed. If the ROCE is high it is because either the profit margin, or the asset turnover is high, or both. Although there is a rule that the higher the ratio, the better the business, one needs to take in account also the type of the business and the industry’s average to know whether the ratio can be evaluated as a sign of a good performance. In the Morrisons case all figures from 10% and higher are considered good.

Thus, we can conclude that Morrisons obtains adequate profits in relation to the funds invested. The return on equity ratio measures the rate of the return on the ownership interest of the common stock owners. Return on equity ratio was from 12. 65%, to 12. 08% for the observed period. If the return on equity is 12. 08% then around 12 cents of assets are created for each pound that was originally invested. This ratio explains the rate that shareholders earn on their shares. If a company obtains high returns in comparison to it’s share equity, this company can easily pay off the shareholders.

Comparing to the industry average (0. 00) Morrisons has a remarkably high ROE. However, in comparison to Tesco (17. 96) , it has a lower value of ROE. The industry Morrisons is evaluated to don’t give us the adequate grounds for comparison because out of many, it’s only actual competitors are Tesco, Asda and Sainsbury. Although for the grocery store’s industry everything over 10% is considered to be a good ROE from management’s point of view and for the shareholders, in comparison to Tesco, Morrison isn’t standing firmly in the terms of ROE.

Although it is not a low value, and in reality is considered as desirable, shareholders might be more interested in investing in its biggest competitor, because they are aiming for the highest return on equity possible. After analyzing the ROCE and ROE we have to notice the clear relation between the two. The only difference is that one is based on profit before interest and taxation (ROCE), and the other on profit after interest and taxation (ROE). We are left with nothing but to state that after analysing the profitability, Morrisons stand on firm ground and are quite desirable for the shareholders.

From a financial perspective one can look at Morrisons ability to cover the dividends it must pay the shareholders. A 2. 40 dividend cover indicates that through its profits, Morrisons can comfortably cover the 8. 50p dividends per share. This ratio is very close to the European retail industry average and it is similar to Tesco’s dividend cover of 2. 10 and Sainsbury’s 2. 26. Accordingly, Morrisons has a 41. 50% dividend payout ratio compared to 47. 50% for Tesco and Sainsbury’s 44. 20%.

It is not surprising that Morrisons has a higher payout ratio, as suggested, it pays lower dividends relative to its earning which is common for a company in a relatively early growth phase. A higher proportion of their profit is probably being employed in growth and expansion, and less on dividend payout. Furthermore, Morrisons can be an favourable investment for those seeking a long term capital growth, as companies with lower payout ratios tend to have a higher return for investors as these companies mature. Although Morrisons shares are currently the lowest out of the mentioned ompetitors, it may be an advantage in the long-term as when the company grows and earnings increase along with dividend paid, it will lead to high return in relation to the initial amount invested. This is clearly supported by Morrisons increase in dividends per share that had a positive linear trend over the past years analysed. However, if an investor is seeking to get a high current income and limited capital growth they might opt for one of the competitors. The above leads us forward to analysing the dividend yield, which relates the current market value of a share to its cash returns. Morrisons has a dividend yield of 2. 4%, whereas Tesco and Sainsbury’s have dividend yield percentages of 3. 54% and 4. 38% respectively. Morrisons shows a relatively low yield, which doesn’t have to be considered as a disadvantage, depending on the share price used in the formula, or the denominator. The fact that the share price affects this ratio means that one has to be cautious when making investment decisions based on dividend yield. If one decides to invest in a company with a very high yield, it may be the case that this company’s share price has fallen (and the dividends remain the same) as a result of the company being in difficulties.

Share prices are determined by investors’ expectations of the future of a company. Therefore, in Morrisons case, share price has remained quite constant in the past, but the dividends paid increased significantly, leading to a trend of stable increase in dividend yield over the past 5 years. However, as Morrisons profits continue to increase, so will the dividends per share, and so will the yield ratio for someone who has purchased the shares at the current price. Despite its imperfections, the P/E ratio continues to be the most widely reported and used valuation by investment professionals and the shareholders.

Moreover it is more than a measure of a company’s past performance that takes into account market expectations for company’s growth. To calculate this ratio we used market closing share price taken on the previous day of financial report being published divided by earnings per share figure. Morrisons P/E ratio of 12. 70 for 2010 suggests that investors are willing to pay 12. 70 GBP for every 1 GBP of earnings that the company generates, or that the capital value of the share is 12. 70 times higher than the current level of earnings attributable to it. While comparing Morrisons to Tesco, its P/E ratio is lower by less than 2 points.

At the same time Tesco is dominant in the market, whereas Morrison is fourth in market growth and its P/E ratio is only about 12 percent lower than one of Tesco’s, which tells the shareholders that the investment attractiveness of Morrisons is not much lower than the one of industry’s leader. The company’s average growth rate of the Pre-tax profits for the past 4 years have been around 35%, which is quite high for this type of business, also counting the fact that share of debt decreased since 2009. In terms of industry, their P/E ratio is ranked third out of 34 companies after Tesco and Greggs.

Based on all mentioned above, we may conclude that Morrisons is an attractive set of metrics and should be considered to be a good stock investment. It is important to mention that since 2009 the P/E ratio of Morrisons has dropped by almost 3 points, even though the profit figure has actually increased by 30. 90% compared to 2009. In our opinion it shows that the company is undervalued, in terms of stock value, and should be going up in the nearest future, which may be seen even as a benefit for Morrisons. In terms of value of investment it is cheaper to buy shares now than in 2009.