Dividend fears for Metcash amid retail war
Page 1 of 3
Christine St Anne is Morningstar's online editor.
Metcash (MTS) is known for its generous dividends. The stock is included in the portfolios of a number of equity-income and high-dividend funds.
According to Morningstar data, the company's dividend yield to date is 8.4 per cent, almost double its peers in the consumer staples sector at 4.6 per cent.
It is also a company under pressure in what is an increasingly competitive retail environment. This is a sector that continues to be squeezed by the big retailers Coles and Woolworths (WOW), which remain locked in a price war.
Morningstar senior analyst Tim Montague-Jones says the impact of this price war is really restricted to the big retailers.
"Metcash may be the third player in the grocery sector, but the price war has really resulted in market share being swapped between Woolworths and Coles. Metcash's market share has weakened, but only very slightly," Montague-Jones says.
Morningstar has a moat rating on Metcash, which means the company is positioned to maintain its competitive advantage in the grocery sector.
Montague-Jones says the company's purchase of the Franklins supermarket business (which merged into the IGA stores) in 2011 strengthened its position in the domestic oligopoly. The failed bid by the Australian Competition and Consumer Commission (ACCC) to block the sale only further strengthened this position.
Furthermore, the ACCC has become increasingly vocal in taking action against Coles and Woolworths to ensure these two groups do not dominate regional and metropolitan areas through creeping acquisitions.
According to Montague-Jones, Metcash operates its business differently to that of the big retailers. Its IGA stores are located in areas where the economies of scale are not sufficient for the big retailers.
"These stores are also well-targeted to the local communities in which they operate," Montague-Jones says.
IGA stores also tend to work with local schools, source local produce, as well as provide food that is in particular demand in a local community. For example, the IGA store in Sydney's Allambie Heights has a wide range of food from the United Kingdom, given the suburb's relatively large number of UK expats.
Metcash also operates differently to the typical food retailer. The business is essentially a marketing and distribution business, which makes food distribution the main growth driver.
But some analysts argue the price war will have an inevitable impact on Metcash's earnings.