Seeking Alpha
Long/short equity, value, growth at reasonable price, research analyst
Profile| Send Message| ()  

When searching for stocks that offer high shareholder remuneration through cash dividends, investors usually look for stable and "safe" businesses that should have high resilience to economic cycles and consequently can maintain their dividends even during economic slowdowns.

One sector that offers a good resilience to macroeconomic cycles is the food retail sector, mainly through companies that have a high percentage of sales derived from food. Contrary to other discretionary goods, food is a basic necessity and therefore sales and cash flows of these companies are relatively stable along the economic cycle.

Geographically, the U.S. is one of the most mature food retail markets in the world and emerging markets are the ones that offer higher growth opportunities. The industry is relatively concentrated at a local level but remains fragmented globally. The key drivers of food retail growth are population growth, income and the level of competition. These factors appear as more favorable in the emerging markets.

In the short-term, economies in the developed world are likely to worsen further and should continue to pressure disposable income, favoring companies with exposure to high-growth countries. For U.S. investors, this means that to capture the best growth opportunities within the food retailers, and therefore higher growth outlook for dividends, they should look for foreign companies. Indeed, U.S. companies are mainly domestic, with the exception of Wal-Mart (WMT), and additionally offer below average yields for shareholders.

The following three stocks offer the highest yields within the sector and have some exposure to emerging markets, thus resulting in a relatively safe income for shareholders.

Company Market ($B) Cap Div. Yield Payout Ratio E/P Ratio
Delhaize Group
(DEG)
3.9 %5.4 %37 6.9
Tesco (OTC:TSCDY) 54.8 %4.4 %41 9.3
Casino Guichard (OTC:CGUIY) 9.8 %4.2 %59 14

Source: Bloomberg

Delhaize Group: Is a food retailer based in Belgium, operating in 11 countries on 3 continents. In 2011, Delhaize had sales of €21.1B ($26B) which represented an increase of 4.6% compared to 2010. Around 65% of Delhaize's sales are in the U.S., 23% in Belgium and 12% in Southeastern Europe and Asia.

Delhaize Group's dividend policy is to pay out a regularly increasing dividend, while retaining free cash flow in an amount consistent with opportunities to finance the future growth of the company. Since 2002, the company increased the dividend each year, with an average annual growth rate over the last five years of 5%. The payout ratio is low with an average at around 33% in the last six years.


(Click to enlarge)

Source: Delhaize

Tesco: Tesco is one of the world's largest retailers with operations in 14 countries across Europe, North America and Asia. It's also one of Warren Buffet's long-term investments. In the last financial year (ending on February 25, 2012), Tesco generated around 65% of sales in the U.K., 16% in Asia, 15% in Europe (ex-U.K.), 1% in the U.S. and 1.5% at Tesco Bank.

In April 2006, Tesco announced a new dividend policy which is increasing its dividend pay-outs broadly in line with its earnings growth rate. The company has consistently increased the dividend over the last few years, with an average annual growth rate of 8% from 2006 to 2011. The average payout ratio is also low at 43%, during the same period.


(Click to enlarge)

Source: Tesco

Casino Guichard: The Casino Group is one of the world's leading food retailers, being present in eight countries with nearly 12,000 stores. Internationally, the company establishes commercial partnerships. In 2011, France represented around 54% of sales, 34% were in Latin America and 8% in Asia.

The company has increased consistently the dividend over the last few years, with an average annual growth rate of close to 7%. However, compared to Delhaize and Tesco, Casino Guichard has more earnings volatility and a higher payout ratio. From 2006 to 2011, the average payout was 50%, but in the last two years, the ratio increased to values close to 60%.


(Click to enlarge)

Source: Bloomberg

Another food retailer with some exposure to emerging markets and an attractive dividend yield is Carrefour (OTC:CRRFY), but as I discussed recently in my article "Carrefour: high upside potential in case of successful turnaround," the company's domestic business is showing a poor performance, which poses into question an income investing strategy with Carrefour's shares.

Source: 3 Food Retailers With Yields Above 4%