Kroger: A Consistent Performer With Further Upside Potential

Mar.19.13 | About: Kroger Co. (KR)

One of the hallmarks of my investing strategy is identifying companies that offer a compelling risk reward proposition. Traditionally I prefer companies that are established with a proven track record that is shareholder friendly. Kroger (NYSE:KR) neatly fits into the above criteria with its proven track record of results. In the article below I will detail the three main criteria that led me to conclude that KR offers a compelling investment.

Kroger Co is primarily composed of traditional supermarkets that operate under different banners spread out over 44 different states. The company was founded in 1883 which certainly signifies longevity and stability. What originally caught my attention is the consistent sales growth. Traditionally, a well established company such as this would have a difficult time growing sales especially in the competitive food retailing industry. KR has reported 37 straight quarters of identical store sales increases. The ever increasing sales numbers are impressive especially when one considers all the economic upheaval we have witnessed over that time frame. As we can see from the table below KR sales have increased over 70% since 2003 demonstrating their consistent ability to grow.

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sales in millions

51760

53791 56434 60553 66111 70235 76148 76733 82049 90374
Dividends

Per shares

$0.00

$0.00 $0.00 $0.00 $0.20 $0.29 $0.35 $0.37 $0.39 $0.43
Shares outstanding

In millions

791

754 736 731 723 698 659 650 638 593
Click to enlarge

The next criteria that I used to determine an investment in KR is the dividend and its rate of growth. With well established companies such as KR a return of profits through buybacks and dividends is crucial for shareholders. It shows that management takes shareholders' economic interests seriously and looks to reward them. In the case of KR the dividend has grown quite significantly since 2007. At its current rate of $0.15 per share paid quarterly the dividend has tripled since its inception. While I don't foresee the above pace continuing, I believe a double digit rate increase per year is likely. At its current rate the yield works out to slightly less than 2% a year which is comparable to the S&P 500 (NYSEARCA:SPY) rate and well above money market rates.

The third criterion builds on the theme of shareholder returns. KR has a long history of aggressively repurchasing shares and expects to continue to do so well into the future. As we can see from the above table, the number of shares outstanding has shrunk 25% since 2003. Management has demonstrated over a long period of time its commitment to shareholder value by consistently repurchasing shares. Warren Buffett's recent purchase of IBM is an example of a company that has successfully utilized slow and consistent sales growth along with aggressive share repurchases to achieve above average returns. For a more detailed review of this topic please click here.

In summary, KR offers a compelling risk reward proposition at its current level. The company will never be a momentum stock, instead it will be a consistent slow and steady performer that allows one to compound and accumulate wealth over a long period of time.

Thank you for reading and I look forward to your comments.

Disclosure: I am long KR, IBM, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.