Finding Hidden Value In SuperValu: Dividend Yield Too Good To Pass Up

Jan.27.12 | About: SUPERVALU Inc. (SVU)

A couple weeks ago, I came across an article here on Seeking Alpha ("SuperValu: Down, But Not Out" by Mark Krieger) that piqued my interest in a stock I would normally skim over without paying any mind. The article explored the idea that SUPERVALU INC. (NYSE:SVU), despite being knocked down considerably quite recently, may in fact be a hidden value play worth examining.

When looking at the issue holistically, however, and examining both arguments, it appears investors are polarized as ever on future prospects of this controversial stock. Call me a contrarian -- or even a fool if you wish -- but I believe SVU might just be a deep value play in the making when taking a few things into consideration.

Here's why I picked up shares of SVU last week when it dipped just below $7 a share:

  1. That 5% dividend yield is just too good to pass up. Sure, a high dividend yield is not necessarily always a good sign. It could mean the underlying fundamentals of a company are in jeopardy; however, with a forward annual dividend of $0.35 per share and projected earnings of $1.20 to $1.30 a share, it's reasonable to believe the 5% yield is fairly safe even after paying down debt and reinvesting in the business.
  2. SVU's forward P/E is looking solid between 5.5 and 6. Every time I come across a stock like SVU sporting such attractive multiples, I really can't help but take notice. I love the fact SVU's P/E is so low and I'll likely be continuing to add to my holdings should it stay in this range for some time should their plan to address the debt level continue.
  3. Despite having a high debt load, SVU is on a mission to pay down what they owe. A debt load of nearly $7 billion is nothing to sneeze at, but SVU remains committed to paying down this figure and will likely lower its debt load by nearly a half billion this year when it's all said and done.
  4. SUPERVALU'S competition doesn't really have much to brag about either. Operating margins for competitor Kroger (NYSE:KR) and Safeway (NYSE:SWY) are practically right in line with SVU's when compared head-to-head. In 2011, KR boasted a 2.65% operating margin, SWY came in at 2.82% and SVU fell in line at 2.6%. It seems odd to me that SVU is trading at such a deep discount to other similar businesses when operating margins are not significantly different either.
  5. SVU is nearing its 52 week low. I generally like to purchase value plays when they're very close to their yearly lows in order to jump in with a margin of safety. Of course, this could be argued that it's a risky strategy for the simple fact that a company doesn't just trade down for trivial reasons. When taking a long term view, though, I believe SVU is headed on the right track and I feel comfortable jumping in at these mouth-watering prices.

Current opinions on SVU vary greatly; however, based upon the five reasons I presented above, I believe SVU has good long term potential and will be able to maneuver out of the recent debt load it has found itself in to become a strong, profitable entity once again. In the meantime, I'll sleep well at night knowing the dividend is fairly safe and SVU will be serving them up while I wait for the share price and underlying fundamentals to improve.

Disclosure: I am long SVU.