CRASH: Why Metcash Limited shares tanked 14%

Credit: Scott Lewis

Shares of Metcash Limited (ASX: MTS) have been pummelled today after the supplier of IGA stores released its full-year earnings results.

Indeed, Metcash’s shares have been on a tear over the last 12 months, gaining almost 77% during that time. Although the shares initially continued that run shortly after the market opened, they have since reversed course.

At the time of writing, the shares have dropped 14.3% to just below $1.82, although they have traded as low as $1.785 today. That’s the lowest the shares have traded at in more than one month.

Source: Yahoo! FInance

Source: Yahoo! FInance

Part of the initial jump may have been attributed to Metcash’s announcement that it intends to recommence its half-yearly dividend payments to investors, beginning with the financial year 2017 final dividend.

The return to paying dividends highlights an improvement in confidence by the group’s management team, suggesting the business will be in a strong enough position to distribute cash rather than needing to hold onto it in order to strengthen its own balance sheet.

However, investors may be concerned about a 7.4% decline in full-year earnings before interest and tax (EBIT) which the company said was due to the planned investment in price by the Supermarkets business. This was seen as necessary in order to better compete with Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES), together with discount retailer Aldi.

Metcash is worth keeping an eye on, particularly if it can continue to improve its competitive position against the industry’s bigger players. However, there are still many hurdles that the group’s management team will need to overcome – investors with a lower tolerance for risk may want to remain on the sidelines until there are more signs of solid progress being made by the business.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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