Safeway, Inc. (NYSE:SWY) shares are in the bargain bin and could be poised to deliver solid results for shareholders in the coming months. The shares of this leading grocery retailer are well below the 52-week high of about $23 per share and now yield a very solid 4.2%. The stock looks undervalued when considering a number of valuation metrics and it even has an upcoming catalyst that could ignite investor interest in the stock. Here is a closer look at Safeway and a few reasons to buy the stock:
1) Valuation presents upside: It seems that the only "cool" grocery retailer is Whole Foods Market (NASDAQ:WFM) which has surged due to the popularity of organic and natural food products. Whole Foods trades for nearly $100 per share and it yields just .6%. Analysts expect Whole Foods to earn about $2.52 in 2012 and around $2.90 in 2013. That puts the PE ratio at about 40 times earnings. However, Safeway has been making substantial progress in adding natural and organic products. Furthermore, Safeway shares look undervalued by comparison. For example, analysts expect Safeway to earn just over $2 per share in both 2012 and 2013. That puts the PE ratio at just around 8 times earnings which is also well below the average of 14 for the S&P 500 Index.
2) The dividend is generous and growing: Safeway has increased the dividend annually since 2005. At that time it was 5 cents per quarter and due to regular increases, it has surged over 300% in less than a decade to 17.5 cents per share. While the average stock in the S&P 500 Index yields just over 2%, Safeway yields about twice as much, which is another sign of undervaluation.
3) An upcoming spin-off creates a potential upside catalyst: Safeway owns a very valuable gift card division called the Blackhawk Network Holdings, Inc. This division offers gift cards which are sold at Safeway as well as many other grocery stores, drug stores and other retailers. It also sells gift cards online. Safeway recently announced it would file for an initial public offering for this business which is expected to occur in the first half of 2013. Safeway shares are likely to edge higher when more news about this spin-off comes out and as it draws closer. For example, Dean Foods (NYSE:DF) shares saw a major rally from about $12 in August to nearly $19 recently. This was partially due to the spin-off of WhiteWave Foods (NYSE:WWAV). Safeway shares are likely to rise when the gift card division has its IPO, and while investors wait, Safeway offers a solid dividend.
Here are some key points for SWY:
Current share price: $16.71
The 52 week range is $14.73 to $23.16
Earnings estimates for fiscal year 2012: $2.01 per share
Earnings estimates for fiscal year 2013: $2.11 per share
Annual dividend: 70 cents per share which yields about 4.2%
Here are some key points for WFM:
Current share price: $98.17
The 52 week range is $62.77 to $101.86
Earnings estimates for fiscal year 2012: $2.52 per share
Earnings estimates for fiscal year 2013: $2.90 per share
Annual dividend: 56 cents per share which yields nearly .6%
Data is sourced from Yahoo Finance. No guarantees or representations
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informational purposes only. You should always consult a financial
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.