Financial review

Returns to shareholders

Returning surplus capital to our shareholders

In March 2008, we announced a two year share buyback programme to return 1bn of surplus capital to shareholders with a target of 500m in the first year. By the end of 2008, we had repurchased and cancelled 57.8 million shares costing 146m. In view of the acquisition of the Co-op stores, the purchase of a number of freeholds and the possibility that further attractive investment opportunities may arise in the medium term, the Board has decided that the capital originally earmarked for share buybacks in the 2009/10 financial year should be retained within the business to give Morrisons maximum financial flexibility.

Progressive dividend growth

The final dividend is proposed at 5.0 pence per share, making the total dividend for the year 5.8 pence per share, an increase of 21% on last year.

We have targeted progressive dividend growth in 2008 and 2009, over and above earnings growth, in order to bring dividend cover to a level in line with the average for our sector, which is around 2.5 times. Funding for this enhanced return to shareholders will come from operating cash flow and committed facilities available to the Group.

Share price and total shareholder value

The Company’s share price was 270.75p on 1 February 2009, a fall of 9% from the start of the year. This compares with a fall of 31% in the FTSE100 index and 14% in the Food and Drugs sector over the same period.

Over a three year period, the Company’s share price has risen by 44% compared with a fall of 28% in the FTSE100 index and a rise of 19% in the Food and Drugs sector over the same period.

Total shareholder value*

Total shareholder value chart

Key judgements and assumptions

Judgements and assumptions made in the financial statements are continually reviewed. Whilst some outcomes have been affected by the volatility in the financial markets, all judgements and assumptions in the accounting policies remain consistent with previous years. Consideration of impairment to the carrying values of assets has been made and we concluded that the individual carrying values of stores and other operating assets are supportable either by value in use or market values. The impact of the current economic conditions on the assessment of going concern has been considered in the general information section of the Directors’ report and business review.

Provisions

The property provision of 112m (note 21) includes 75m for onerous leases relating to sublet properties to cover the shortfall between expected rent received and the rent payable, taking into account the vacant tenancy periods during the terms of the lease. The provision assumptions were reviewed in the last quarter in the light of worsening market conditions. This resulted in a charge of 5m to cover the additional anticipated risk over the life of the leases.

Store acquisitions

In December 2008, we agreed to purchase a number of stores from the Co-operative Group, subject to Office of Fair Trading (OFT) approval. The stores have an average retail square foot size of c.14,000 and will fit very well within our existing portfolio of around 150 smaller stores.

The acquisition was agreed at a price of 223m, of which a refundable deposit of 22m had been paid by the year end. Should the purchase obtain full OFT approval, the remaining 201m will be paid by instalments during 2009, and a store refurbishment programme costing a further 98m will commence in spring 2009.

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