Industry Analysis: Grocery Store Stocks

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Includes: ADRNY, KR, WFM
by: Dividend Diplomats

This week, I felt like taking a different approach to finding hidden gem dividend growth stocks. Typically, as I did with my watch list last week, I run the Dividend Diplomats Stock Screener and try to identify a sample of stocks that fit my metrics that I can buy at that moment in time. And if that doesn't work, Lanny or I will run a different screener and create a "Top 5" stock list of some sorts and identify a certain type of dividend stock we are targeting. For example, we have run screeners for low dividend yield, high dividend growth rate stocks and dividend growth stocks with low debt to equity ratios in the past. This time, my approach was to identify an industry that is not represented in my portfolio and check out a few dividend stocks in the sector and see what I'm missing. Maybe they will fit, maybe they won't… but there is only one way to find out. For today, I wanted to check out some grocery store stocks that pay a dividend.

Before I dive into the results, I wanted to dive into how I generated the population. On the website, www.finviz.com, I entered the following metrics to generate the population:

  • Industry = Grocery Stores (obviously)
  • Market Cap = Greater than Mid-Cap (+$2B)
  • Dividend Yield = Greater than 0%

Using this population, I told myself I would select the grocery store stocks with three highest dividend yields and check them out. I focused on mid-caps and greater because I personally am not that interested in investing in small cap stocks, even if they pay a dividend. They are still a major gamble at that point and there isn't always as much information about the companies available in the market place. That last point isn't always the case, but I have noticed it before. Plus, I one time tried investing in a small-cap dividend stock in my "Bert's the smartest man in the room" moment at the beginning of my investing career and was quickly tossed off my throne and was humbled. That left a sour taste in my mouth and thank goodness it was not for a lot of money. I selected the three highest yields in the industry because, as I found out, stocks in the grocery store industry do not pay a relatively higher dividend yield. Those are the basic rules for my simple industry screener and now it is time to evaluate the results!

Grocery Store Stock #1: Delhaize Group (Ticker: DEG). Delhaize Group is the highest yielding dividend stock of the industry, sporting a current dividend yield of 1.9%. This point really shocked me considering the fact that it is barely in line with the S&P 500. I'm not going to lie, before this screener, I had never heard of the company so I checked its website. Delhaize is an international grocery store that operates in the Eastern United States, Belgium, Southeastern Europe, and Indonesia. In the US, its store brands include Food Lion and Hannaford… ah now that rings a bell! Delhaize pays an annual dividend at the beginning of June (DARN, missed it already for 2016) and does not really have a history of increasing its dividend regularly. Average EPS estimates for next year on average are $1.72/share, so the company's forward P/E ratio and forward payout ratio are 15.25X and 30%.

Grocery Store Stock #2: Kroger (Ticker: KR). You can't grow up in the Midwest and not hear about the large grocery store chain Kroger. Although, I do find it fascinating that it does not have stores in Cleveland, but that's a different story. Kroger operates in over 35 states and has a dividend yield of approximately 1.4% I swear I didn't know this when I started writing this article, but just a few days ago Kroger announced a 14% dividend increase and approved a $500 million share buyback program. Talk about a company making some moves, that's some great news for its shareholders. Kroger has increased its dividend for nine consecutive years and has a five-year dividend growth rate of 15.55%. Further, using its forward EPS of $2.45, Kroger has a forward P/E ratio and forward payout ratio are 14.15X and 19%.

Grocery Store Stock #3: Whole Foods Market (Ticker: WFM). Another major chain grocery store in the United States. You can find a Whole Foods in what seems like every major city in the US. On a personal note, I am excited to see how the 365 store concept works for the company as it finds ways to get its store brand into the consumers hands/shopping carts. It could pay some nice dividends for the company and I kinda of wish it would open one up here! Whole Foods has a dividend yield of approximately 1.75% and has increased its dividend for four years. Woah, another grocery store stock with a sort of dividend increase history. Using WFM's forward EPS of $1.70, Kroger has a forward P/E ratio and forward payout ratio are 18X and 31%.

If you all couldn't tell, this was a pretty high level overview of the grocery store industry. However, I didn't really need to dive into the details any further to answer my question from the introduction of whether or not a grocery store stock will fit my portfolio. It is an easy answer for me… no. For me to consider a stock with a yield below the S&P 500, I need to be blown away. Between the low dividend yields and the short-term history of increasing dividends, I am not interested. Further, the dividend growth rates and economic moats in my opinion aren't like Starbucks' (NASDAQ:SBUX) and Visa's (NYSE:V), which allowed me to overlook the low yield (among other reasons for investing in the stock) when I added them to my watch list a few months ago. Honestly, if I were going to add some grocery store exposure to my portfolio, I would opt for the stock that Lanny just recently purchased… Target (NYSE:TGT). Trust me, it has a great grip on the grocery store market considering my new wife and I do a lot of our grocery shopping.

Do you own any of the stocks listed in this article? If so, what points am I missing in this overview? Are you exposed to the grocery store industry by owning a grocery chain or indirectly through owning Target or Wal-Mart (NYSE:WMT)? Have you looked at the grocery store stock industry before and have any insight that would be helpful and possibly change my mind?