Santander downgrades Wm Morrison on "dividend dilemma"

4th Sep 2014 12:59

Santander has downgraded Wm Morrison from 'hold' to 'underweight', saying that the supermarket chain is facing a "dividend dilemma".Santander slashed its target price for the stock from 220p to 170p.Upcoming first-half results from Morrison on 11 September are expected to be "weak" though have been well flagged, the bank said. It estimates a 55% decline in pre-tax profit to £181m."The latest Kantar data underline how tough the UK food retail market continues to be for the big four, though it looks as if Morrison's price initiatives are starting to get some traction from the latest Kantar print," Santander analyst Tim Attenborough said.Company-compiled consensus forecasts are for a like-for-like sales decline of 6.9% in the first half, though Kantar figures for the 12 weeks to 17 August point to an "encouraging entry rate for the third quarter", Attenborough said."However, we do not see the progressive dividend policy as sustainable, despite the chief financial officer's commitment in March to a 5% dividend increase in 2014/15."We think the increasing competition in the UK, particularly with the prospect of a resurgent Tesco and the continuing pressure on margins means that the Morrison dividend (currently yielding almost 8% if the 5% promised increase materialises) is unsustainable, in our opinion."He expects the interim payout to be raised by 5%, in line with guidance, but the full-year dividend to be halved to 6.5p.Attenborough believes that the fiscal year ending January 2016 will be "another difficult" period for the company and that the profit recovery will take longer than previously expected.The stock was down 1.1% at 173.3p by 12:38 on Thursday.BC