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Should I buy Marks and Spencer shares for BIG dividends?

Smartly dressed middle-aged black gentleman working at his desk
Smartly dressed middle-aged black gentleman working at his desk

The Marks and Spencer (LSE: MKS) share price has slumped 52% in 2022. Like many UK retail shares it’s plummeted as the cost-of-living crisis has battered disposable incomes.

The result is that Marks’ dividend yield now sits well above the market average. For the years to March 2023 and 2024 they come in at 3.6% and 4.9% respectively.

Both these figures are comfortably ahead of the FTSE 250’s 3.2% forward average.

The question, as always, is whether Marks and Spencer shares are worth the risk. And of course, whether the business looks in good shape to meet the City’s dividend forecasts.

Profits Sink 24%

It must be said that Wednesday’s half-year announcement hasn’t boosted my confidence.

Like-for-like sales across its Food division rose 3% in the six months to September. This was thanks to price rises and the recovery of its franchise and hospitality businesses following Covid.

Comparable sales at Clothing & Home jumped 13.7% due to solid online sales and store revenues returning to pre-pandemic levels.

However, Marks’ pre-tax profits tanked 23.7% (to £205.5m) as costs soared. Excluding rate relief, these increased 8.4% from the same 2021 period, exacerbated by the company’s investment in areas like data and technology.

Tougher next year?

The worry for Marks and Spencer is that these tough conditions look set to continue.

Kantar Worldpanel research showed food price inflation hit a record 14.7% in the four weeks to 30 October. It warned that it is “still too early to call the ceiling” too, spreading doubt over disposable income levels in the short-to-medium term.

Marks certainly expects things to get tougher. Today it said that “it is highly likely that conditions will become more challenging in financial 2024” across all of its markets.

Dividends in danger

This naturally raises doubts over whether the shares will be a good choice for dividend income.

The business hasn’t delivered any shareholder payouts since the pandemic. And today’s release has raised doubt on City forecasts that dividends will return this year.

Marks has said that “the board will defer consideration of capital allocation policy and options for reinstating capital returns to shareholders until nearer the year end.”

The verdict on the shares

I’m not convinced Marks and Spencer is a top stock to buy to boost my passive income. But there are things as a share investor that have impressed me.

The company’s Food business is outperforming the market, and its Clothing and Home division growing market share. I’m also encouraged by the pace at which online sales are growing.

Digital revenues increased 4.9% in the first half from a year earlier when Covid-19 lockdowns had boosted sales.

Having said that, I still believe Marks shares carry too much risk right now. I’d rather buy other dividend stocks given its uncertain profits outlook for the next two years.

The post Should I buy Marks and Spencer shares for BIG dividends? appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022