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Research analyst, valuentum
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A few months ago, we profiled a small Midwestern grocer, by the name of Roundy's (RNDY) that we thought had some serious upside potential. We noted the company's strong execution of new store openings in the Chicago area, as well as CEO Robert Mariano's fantastic job managing Dominick's, another Chicago grocer, prior to its acquisition by Safeway (SWY).

As speculated prior to its initial public offering, Roundy's declared a quarterly dividend of $0.23 per share or an annual yield of roughly 8.5% at its current price. However, our forward-looking Valuentum Dividend Cushion suggests, that with a score of -1.07 that the dividend is not at all safe, and likely to get cut. Therefore, we think income investors should seek a safer yield elsewhere, as we think this dividend will likely be slashed.

Unfortunately, the company reported negative same-store-sales growth and cut its outlook for 2012 during its last earnings report. The company went as far as to blame the Green Bay Packer's failure to make the Super Bowl as one of reasons behind the lackluster results. Unless you've been to Wisconsin, you'd think this was a terrible excuse, but the entire state really does rally behind and embrace the team on a quasi-religious level, so we think that's actually a reasonable excuse. The stock fell from over $12 to under $10 per share, until the company declared its dividend and it was revealed that market-moving hedge fund manager David Einhorn had taken a small stake in his fund's portfolio.

Though we think the company is undervalued at current levels, the firm will likely face a tough road ahead. Increasing competition from Woodman's and Wal-Mart (WMT) supercenters in Wisconsin will make it difficult for the company to increase sales in that market. Both offer slightly better pricing and mostly newer stores relative to the somewhat dated Copps stores. Instead, the company will have to focus on operational efficiency and private-label sales to increase profitability rather than revenue.

Additionally, prime real estate in Chicago is both expensive and hard to come by, making expansion a slow process. However, aside from one low-traffic location in Chicago's River East neighborhood location, we think the company's store locations have been excellent thus far, and we're excited about some of the locations the company is adding in high-income, high-traffic areas. Mariano's reputation as a luxury grocer with reasonable prices will help the company steal share from Dominick's and Jewel (SVU), in our view. Mariano's also offers an impressive array of private-label products, that we believe consumers are becoming much more comfortable with in the wake of the last recession.

At its current price, Roundy's trades at just a touch under 8 times its 2012 normalized EPS, while its peer group trades at around 13 times forward earnings. Therefore, we think Roundy's has value on both a relative and DCF basis. Management has indicated they think the company will be able to pay out its dividend going forward, but we are skeptical on the basis of our outlook of the firm's future cash-flow generation. While its yield might not be here to stay, with think Roundy's is an undervalued company in a poor industry that could produce a nice return for risk-tolerant investors.

However, we're still waiting for positive momentum indicators to materialize before we would consider the company in either of our portfolios. We show why a collection of stocks that have both value and momentum characteristics generally outperform a long-short portfolio of stocks consisting of either the value, growth, momentum, or growth-momentum variety in our white paper, which can be downloaded here. Nothing strategy comes close to the power of 'Valuentum' investing, according to this white paper.

Source: Revisiting Roundy's: Dividend Now In Play