In general, retail stocks have had it bad for a while now. But very few have been battered to the extent of grocery giant Kroger Co (NYSE: KR). When market leaders get pummeled, dividend investors usually have reason to rejoice. After all, how often can you afford to snatch such stocks at bargain prices?
So, another retail article, another mention of…that’s right, Amazon (NASDAQ: AMZN). It would appear we can’t avoid mentioning the e-commerce powerhouse when the conversation shifts to retail. Amazon is partly responsible for the recent beating Kroger’s shares took. However, there are also those who believe the market has got into the habit of over-reacting when some news of Amazon’s actions comes out. Let’s delve into the story of Kroger to see if this long-lived corporation is truly in danger of being swept away.
The biggest traditional grocer in the US started in 1883. Using all of his savings ($372), Barney Kroger opened a grocery store in Cincinnati, Ohio. The company was incorporated in 1902.
Fast forward to the present day and we find Kroger a Fortune 100 company (number 17 in 2016) and the employer of about 443,000 people.
The company wrapped up 2016 with revenues of $115.3 billion. According to the annual report, it finished the year with 2,796 supermarkets, with 1,445 of them having fuel centers. In addition, Kroger operates 784 convenience stores, 319 fine jewelry stores, and an online retail business. It’s also the number five pharmacy operator in the US by number of locations: 2,231 of its food stores have a retail pharmacy outlet.
As of this moment, Kroger’s market capitalization is $20.9 billion.
The good and the bad
Kroger has taken a sound beating in the past month. First, investors were spooked by the full-year earnings guidance downgrade. It came in mid-June, when the company released its results for the first quarter of 2017. The announcement triggered a 19% slump in the share price. A day later, the stock lost another 9% after Amazon said it had agreed to acquire Whole Foods (NASDAQ: WFM) for $13.7 billion. The market took this as an ill omen for the grocery sector and reacted accordingly.
It seems to have become a habit to cite Amazon as the destroyer of all things retail. However, entering a new market requires more than throwing cash around. Success takes years of investing in infrastructure, supply chain, geographic expansion, and customer trust. Kroger has paid its dues and can now fall back on the strengths built over many years.
Operators in the grocery sector basically compete on price. For this reasons, margins are paper-thin and scale plays a huge part. This is something Kroger has. Also, let’s not forget that this is a company that has been around for more than 130 years. It has become adept at dealing with competition and navigating through tough economic times.
Kroger also counts among its advantages its 38 food production facilities. Around 40% of the private-label goods sold in its stores are items made at company plants. In addition, its own brands contribute 26% of sales. The manufacturing operations allow Kroger to keep costs low and compete effectively on price.
Since 2006, when Kroger launched its dividend program, the annual payout has grown by 13% on average. In June, the company announced that the 2017 total would rise to $0.50 per share from $0.48 in 2016. The quarterly distribution amounts to $0.125 per share.
In the same statement, Kroger said its board had signed off on a stock repurchase program of $1 billion. As chairman and CEO Rodney McMullen noted, the company has bought back almost 50% of its shares since the start of 2000. Over the same period, Kroger has returned about $14 billion to stockholders through buybacks and dividends. In the last four quarters, the total shareholder return exceeded $1.9 billion.
Investors who prefer established companies with solid track records of success now have a very good opportunity to grab some Kroger stock. The events from last month have dragged the shares very close to their 52-week low. At the time of writing, the stock is changing hands for $23.12. Over the past year, it has traded in the range of $20.46 to $37.62.
On top of that, Kroger has a forward P/E multiple of just 11.5 against an S&P 500 average of 19.9. This also compares very favorably to the company’s median value of 17.8.
The fact remains that Kroger will never thrill investors with exceptional growth. Fierce competition, low barriers to entry, and online shopping are some of the issues Kroger has to contend with. On the other hand, this company has seen it all and lived through it. We can expect it to stick around and continue to ply its steady course. Income investors may also consider getting on board because of management’s stated commitment to rewarding shareholders. Judging from its actions so far, Kroger seems like a dividend stock worth a thought.
I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.
This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.