SuperValu: An Ultra-Risky Dividend Play

| About: SUPERVALU Inc. (SVU)

On Friday, January 27 this year, I explored the idea that Supervalu Inc. (SVU) may indeed be a deep value play, sporting a dividend yield north of 5%, and a solid plan to begin paying down its debt. Since then, SVU is down about 15% and more and more negative press on the company is surfacing nearly every day.

If it isn't talk about SVU potentially cutting dividend, it's news about "pink slime" or the significant amount of investors shorting the stock. From nearly all angles, an investment in SVU looks like a massive mistake for investors. I often kick myself, questioning as to what I saw in SVU and why I continue to hold the stock. At a personal level, I suppose this stems from extreme stubbornness and an ability to be able to "gamble" with a very small percentage of my portfolio from time to time.

Being a tried and true value investor, however, I have to stop and wonder what all the commotion is about. After all, purchasing stocks when they've been unfairly beat down is one of my favorite pastimes. (Maybe I need a new hobby though, since I might just get burned on this one.) It wouldn't be a stretch to say there actually are many good reasons this grocer's share price has been beat down in the recent past.

Here are the straight issues:

1. SVU has acquired quite a bit of debt. The debt-to-equity ratio is dangerously high as it approaches 8.90 and certainly higher than of its peers. To me this signals SVU's inability to properly manage money, spending much more than it should. What also probably doesn't come as a surprise is SVU's quick ratio of 0.25, signaling the company's cash reserves are severely restricted.

2. Earnings per share have tumbled. SVU did much worse last year, reporting a trend of rapidly declining earnings. The company reported a loss of -$7.14 versus $1.85 a year earlier.

3. The dividend appears to be the only glimmer of hope for the share price. Despite falling 34% over the past year and 27% YTD, the one positive allowing investors to keep hope is the monster dividend yield. With a current yield of 5.9%, SVU's payouts seems like a birthday-and-Christmas present rolled into one.

But consider this:

4. Analysts are predicting SVU will earn $1.23 a share in earnings this year. That may not sound like a whole lot, but when we consider a year prior, the company posted earnings of -$7.14, that's a huge improvement.

5. The company's liquidity has increased from the same period last year. This at least suggests the company's cash situation is headed in the right direction, despite still being in a not-so-great position.

6. SVU is trading at a deep discount to its peers. Meaning, if the company was able to turn things around, it's conceivable that the share price would rebound as well. It's a risky maneuver, but one that could potentially reward shareholders handsomely.

All in all, a bet on SVU, given the company's shaky footings is risky to say the least. Investors like me really have no other reason to hold on, except for the enviable dividend payouts we receive, and a glimmer of hope that the company might be able to turn things around one day. In the meantime, I'll continue to "place my bets" with SVU, collecting the attractive dividend and crossing my fingers that management has at least a halfway decent plan to improve conditions.

Disclosure: I am long SVU.