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Metcash Limited falls 15% as dividend payout plunges: Should you buy?

What: Shares in Metcash Limited (ASX: MTS) have been crushed as the group’s underlying profit fell 9%, for the half-year ended 31 October 2014.

With shares down 15% at midday, Metcash shareholders have also had to digest news of a big cut to its interim dividend. At just 6.5 cents per share, the payout is down 31.5% from a year ago.

Here are the key takeaways from today’s result:

  • Sales revenue up 1% to $6.645 billion
  • EBIT of $165.8 million, down 10.9%
  • EBIT margin of 2.5%, down from 2.8% last year
  • Operating cash flow down 44.2% to $128 million
  • Earnings per share of 11.4 cents
  • Profit from ordinary activities after tax attributable to members down 5.2%, to $101.7 million

So what: Metcash is at the beginning of a much needed five-year transformation to its operations. Indeed it is facing further price deflation and intense competition from not only Australia’s two largest grocers, Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES), but also foreign giants, such as Aldi.

Although some positives could be taken away from today’s result – such as the sales increases from its Hardware and Automotive division – Metcash is facing a number of structural challenges in the near-term.

Now what: CEO Ian Morrice said: “Six months into the Transformation Plan, Metcash is in a better position to provide guidance on FY15 earnings, given the now likely timing of initiatives and investment. FY15 Group EBIT is anticipated to be $315- $330 million.” Implying a rather flat second half result.

Should you buy?

Whilst there are some encouraging signs from the group’s first half results, it is facing the prospect of further pressures on its profit margins as competition increases and prices fall. At $2.20 per share, Metcash trades on a forward P/E ratio of just 10 and forecast dividend yield of slightly more than 6% fully franked. Although this may look cheap, in my opinion, long-term investors would be wise to steer clear of the stock until we get a greater insight into the success of its turnaround strategy.

As Warren Buffett famously said: “Turnarounds seldom turn.”

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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