Morrisons shares applaud CEO exit though dividend cut may loom

Wm. Morrisons Supermarkets has this morning taken harsh but necessary action in an attempt to bring several quarters of tumbling sales under control—it has sacked its Chief Executive Dalton Philips.

The final straw for the CEO, who had been looking increasingly embattled, was the group’s all-important trading update for the Christmas sales season, released today.

Morrisons is the last of the ‘Big Four’ UK supermarkets to publish its performance for those weeks and, amid much attention from investors, Morrison is facing the embarrassing fact that its figures have come out as the worst amongst its peers, albeit quite marginally.

Additionally, whilst the northern England-based group announced sales at stores open over a year, fell 3.1% in the six weeks to 4th January, that was still better than average forecasts by institutional investors compiled by Thomson Reuters.

Consensus was expecting a 3.8% fall.

Sales in the Christmas period were also much better than the 6.3% fall seen in Morrisons’ third quarter.

Writing was on the wall for Philips

All this suggests that whilst the writing had been on the wall for Philips for months (Morrisons actually released a profit warning in the Christmas before last) it’s unlikely his departure hinged entirely on the supermarket’s Christmas sales performance

Morrisons said in a statement that it needed a new leader to return to growth.

The supermarket has lagged rivals Tesco, Sainsbury’s and Asda for the entire five years with Philips at the helm and continues to rapidly bleed market share to discount chains like Aldi and Lidl.

Obviously the pressures Morrisons is under are affecting its rivals too to a similar degree, though the firm pointed out this morning that directly comparable figures for the previous year were very favourable—same-store sales fell 5.6% in the Christmas 2013 trading period.

The implication is that CEO Philips failed to significantly beat a very low bar of expectations.

Morrisons newly appointed chairman, Andrew Higginson said: “In the next chapter of Morrisons’ development, we need to return the business to growth”.

“The Board believes this is best done under new leadership”, Higginson added.

Morrisons said it already started the search for a new CEO and Philips will remain in his role until the year-end results in March to ensure a smooth transition.

Today’s news suggests the supermarket has begun a revamp of senior management—Higginson himself will only begin to officially occupy the chairman’s role when current chair Ian Gibson steps down as scheduled, on 22nd January.

This seems to bring the prospects of Morrisons’ Group Finance Director Trevor Strain, into focus, although perhaps not sharply—he has been in his role for just 2 years.

Shares may need dividend reality check

Either way, the market has decided to take the news that same-store sales didn’t fall as much as expected, and by implication the CEO’s exit, very positively.

The stock surged more than 5.5% higher within minutes of the open, rising back above its 200-day moving average for the first time since November 2013.

Still, the stock looks to have come to a way point—around 188p—that has given the shares pause for thought several times since the middle of last year.

Whilst applauding the fact that Morrisons appears to be finally following the lead of Sainsbury’s and Tesco in putting in place action plans to turn itself around, the market will also be aware that some moves could be painful for investors.

Unlike its two rivals, Morrisons has so far remained oddly silent about its dividend plans.

That leaves it with a generous (perhaps over-generous) yield of 6.9% in its current year, matching forecast earnings.

Cutting the yield to 6% would still leave coverage at only 1.3 times.

Whilst dividends continue defying gravity, that will not last and the stock may, in turn, soon have to gravitate back below its 200-day moving average.