Citi upgrades Morrisons to 'buy', plays down dividend concerns

9th Sep 2014 10:51

Comments from Citigroup were giving the share price of Wm Morrison a boost on Tuesday as it upgraded its rating on the stock from 'neutral' to 'buy' and played down recent concerns about a dividend cut."We believe Morrison's circa 7.5% dividend [yield] is safe," said analyst Pradeep Pratti.He said that the company should generate around £350m of free cash flow (FCF) on average over the next three years which will be enough to cover the annual dividend payment of just over £300m, which is expected after management guided to a 5% dividend increase this year."Even if operating profit undershoots consensus by say 10% over the forecast period, we think FCF alone can mostly cover dividend," Pratti said."This is before even factoring the circa £1bn proceeds from property portfolio the company hopes to generate over the coming two-three years through disposals and reducing its freehold share of the store estate to 80%."Even assuming that the dividend is cut by one third, Pratti estimates that the shares would still be yielding 5%."Investors are getting paid to wait, in our opinion," he said.As for Morrison's trading performance, the analyst noted that the company's market share has slipped by 40 basis points year-on-year since it began to cut prices on 1 May. In the six months prior to the price cuts, its market share had fallen by around 60 basis points.Pratti said the absence of a sharp decline in market share - which one would have expected near term due to price investments - should help reassure and suggests a modesqt underlying recovery in sales volumes.The bank has trimmed its target from 220p to 190p for the stock, which was up 2.8% at 174.8p by 11:11.