Tuesday tips round-up: Morrison, Taylor Wimpey, Barrat Developments

18th Mar 2014 07:21

The dividend payment at Morrison is expected to be only slightly covered by earnings going forward as the supermarket operator slashes its prices to take on rivals, such as discounters Aldi and Lidl. In fact, the firm announced a five per cent increase in its dividend pay-out despite the fact that underlying pre-tax profits are due to fall to as low as 325m pounds by February 2015. As surprising as that might seem it is doable, as the company is still highly cash generative and cash is expected to flood in as it slows down spending on new stores and sells off some sites, approximately 1bn pounds worth over three years. Hence, the dividend will be thrice covered by free cash flow of about 900m pounds. However, the share price could be knocked lower if the stock re-rates from about 14.7 times earnings to around nine times profits. Then there is the risk that rivals counter with additional price cuts of their own. The Daily Telegraph's Questor team thinks capital preservation should always come first. In their opinion, therefore, the stock remains no better than a hold now.While surprising to some observers the enormous run higher in the shares of housebuilders may be set to continue. Indeed, the government's Help to Buy scheme has helped the sector, handing them over close to a fifth of the value of each home they complete and sell in taxpayers' money. Nonetheless, the sector was already recovering before the original scheme was put into place in 2011. More importantly, these companies are highly geared, operationally, which means that increases in volumes feed through quickly into profit. The result, naturally enough, has been firms flush with cash. Analysts believe Taylor Wimpey may still be able to raise its returns to shareholders further after 2015 without hurting growth. Meanwhile, Barratt Developments recently announced that it will halve its dividend cover, in the process promising to return £365m of capital to shareholders over the next three years, writes The Times's Tempus.AB