Should investors buy M&S shares now that dividends look set to return?

Marks and Spencer (LSE: MKS), now better known as simply M&S, shares are having a great run at the moment. Year to date, they’re up more than 50%.

They’re still trading at a discount to the broader UK market however. With that in mind, is now the time to buy them?

The turnaround plan’s on track

When I last covered M&S in November, I noted that the company had a plan to turn things around. This involved simplifying the organisation, focusing on growth categories and channels, and cutting costs.

The good news is that this turnaround plan appears to be working. For the year to 1 April, the group posted:

  • Clothing and home sales growth of 11.5% year on year
  • Food sales growth of 8.7%
  • Overall sales growth of 9.9%

Now pre-tax profit was down on the figure posted a year earlier. It came in at £482m – 8% below last year’s figure. However, this was well above the consensus forecast of £436m. This explains why the company’s share price surged after the results – earnings were much better than expected.

Overall, the numbers posted were quite encouraging, to my mind.

One year in, our strategy to reshape M&S for growth has driven sustained trading momentum, with both businesses continuing to grow sales and market share

CEO Stuart Machin

Return of the dividend

What was also encouraging was the fact that the company said that it plans to restore its dividend this financial year.

M&S suspended payments to shareholders at the start of the pandemic in order to protect its balance sheet and give itself room to invest in transformation.

However, it recently said that with the business generating an improved operating performance, and its balance sheet strengthened, it plans to pay a ‘modest’ annual dividend to shareholders, beginning with an interim dividend at the results in November.

What ‘modest’ means here, we don’t know. However, it’s worth pointing out that the consensus dividend forecast for FY2024 is 5.48p per share right now. That equates to a yield of around 2.9%.

I would take this estimate with a grain of salt though. Forecasts can be way off the mark at times, especially when companies are looking to re-introduce payments after they’ve been suspended.

Value on offer

Turning to the valuation here, M&S shares currently have a forward-looking P/E ratio of 11.8, falling to 10.1 using next year’s earnings forecast.

To put these figures in perspective, Tesco’s ratios are 12.3 and 11.1. Meanwhile, the median P/E ratio across the FTSE 350 index right now is 12.8.

So there could be some value on offer here.

Should investors buy?

This is not the kind of stock I’d buy personally. I prefer to take the ‘Foolish’ approach to invest in companies that are typically very profitable and have great track records when it comes to generating shareholder wealth.

However, if I was a ‘turnaround’ investor, I may consider buying its shares. The turnaround plan here is working, and the share price is benefitting as a result.