Kroger Co: Dividends, Earnings And Valuation Analysis

Mar.22.12 | About: Kroger Co. (KR)

A Dividend Challenger is defined as a company that has increased its dividend every year for five-nine straight years. Kroger Co (NYSE:KR) is a Dividend Challenger that has raised its dividend every year for six consecutive years. The complete Dividend Challengers list is compiled courtesy of David Fish. (Open as an excel spreadsheet and look at the tabs on the bottom to find the Dividend Challengers list).

About Kroger Co

Kroger, the nation's largest traditional grocery retailer, employs more than 339,000 associates who serve customers in 2,435 supermarkets and multi-department stores in 31 states under two dozen local banner names including Kroger, City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry's, King Soopers, QFC, Ralphs and Smith's. The company also operates 791 convenience stores, 348 fine jewelry stores, 1,090 supermarket fuel centers and 39 food processing plants in the U.S. Recognized by Forbes as the most generous company in America, Kroger supports hunger relief, breast cancer awareness, the military and their families, and more than 30,000 schools and grassroots organizations in the communities it serves.

Kroger Co : A Dividend Challenger with 6 Consecutive Years of Dividend Increases

Since dividends are paid out of earnings, a clear perspective of a company's historical earnings growth record is a vital component of a dividend investor's prudent due diligence process. The following graph plots Kroger Co's earnings per share since 1998. A quick glance to the right of the graph shows that Kroger Co has increased earnings at a compounded rate of 6.1% (see purple circle on graph) per annum.

(Click charts to enlarge)

Click to enlarge

Click on this link to a LIVE and fully functioning graph on Kroger Co . We suggest running graphs over numerous time frames as part of a more comprehensive fundamental analysis.

Dividend Challengers: 5-9 Years Straight of Dividend Increases

With interest rates hovering near all-time lows, investors seeking income are faced with very limited choices. The traditional high yield available from bonds and other fixed income vehicles are no longer available to meet the goals of retirees needing income to live off of. Moreover, it is almost a certainty that today's low yields are not adequate enough to fight inflation. Consequently, there is a growing investor interest in dividend paying common stocks, especially those that have a long record of increasing their dividends every year.

Earnings Determine Market Price and Dividend Income: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings to both price movement and dividend income. The earnings growth rate line or True Worth ™ line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Since dividends are paid out of earnings, and therefore represent additional return on top of what the market capitalizes earnings at, they are depicted by the light blue shaded area and stacked on top of the earnings line. Therefore, a quick visual of these two important components is simultaneously revealed: The additional return that dividend paying stocks provide, plus the percentage of earnings paid to shareholders as dividends (payout ratio).

Click to enlarge

Performance Table: Capital Appreciation and Dividend Income Kroger Co

The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two components of total return: Capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 1.9% capital appreciation (Closing Annualized ROR), long-term shareholders of Kroger Co would have received an additional $10,965.63 in dividends that increased their total return from 1.9% to 2.5% per annum.

(Note: Since this is a Dividend Challenger it has raised its dividend every year for at least 5-9 years, therefore, negative dividend growth rates shown, if any, will be attributed to special additional dividends paid in excess of the company's regularly reported dividend rate)

Click to enlarge

The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as normal as it has been since 1998.

Click to enlarge

A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Kroger Co is .15, which is historically low.

Click to enlarge

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns, and the dividend and its growth rate are a function of two critical determinants:

  1. The rate of change (growth rate) of the company's earnings
  2. The price or valuation you pay to buy those earnings

Therefore, forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.

Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. At its current price, which is attractively aligned with its True Worth™ valuation, Kroger Co represents a potential opportunity to invest in a Dividend Challenger at a reasonable price. The important factor is that Kroger Co has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for an increasing dividend income stream and potentially attractive future returns.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 17 leading analysts reporting to Capital IQ forecast Kroger Co long-term earnings growth at 9.9%. Kroger Co has high long-term debt at 63% of capital. Kroger Co is currently trading at a P/E of 11.7, which is outside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Kroger Co's True Worth valuation would be $54.70 at the end of 2017, which would be a 16.2% annual rate of return from the current price, including assumed dividends.

Click to enlarge

Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price and dividend income in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Kroger Co to an equal investment in 10-year Treasury bonds illustrates that Kroger Co's expected earnings would be 6.5 times that of the 10-Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Click to enlarge

Summary & Conclusions

This report presents essential "fundamentals at a glance" on Dividend Challenger Kroger Co, illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conduct his or her own due diligence in order to validate whether the consensus estimates seem reasonable or not.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.