SpartanNash: Heavy Debt, Safe Dividend

Summary

• Dividend companies are traditionally less volatile than non-dividend companies, even in the deep value world.
• SpartanNash pays a high dividend that has been growing. Earnings remain positive but are falling. This dichotomy may lead to destruction.
• SpartanNash operates in a highly competitive market, but has some catalysts on the horizon that could reduce debt and improve efficiency.
• CEO transition is costly and weighing on EPS.
• Long-term headwinds like Amazon's play into the grocery space reveal SpartanNash's lack of focus on technology and data-driven sales strategies.

Investment Thesis: I believe SpartanNash (NASDAQ:SPTN) is undervalued on a book value basis. Its high dividend and predictable cash flows further support this thesis. SpartanNash has a large debt and razor-thin margins pushing down the stock price, but increases to efficiency and asset sales will help drive down debt.

Volatility and dividends

When I first focused on investing, I zeroed in on dividend growth stocks as my preferred method of investing. Since then, I've transitioned into a more deep value investing style. I began to target companies that trade below book value. However, I soon discovered deep value stocks tend to be much more volatile than their traditional value counterparts.

I've recently targeted SpartanNash as a new deep value candidate to combat this volatility. SpartanNash is a dividend-paying company that trades below book value. I've found that dividend-paying stocks tend to be less volatile than non-dividend stocks.

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SpartanNash and industry consolidation

SpartanNash is a company paying a high and growing dividend at ~6.42% yield. It also is below book value at ~.62 P/B and has positive earnings. This has all the makings of a great investment, with a bit of a caveat. It has a high level of debt that is dragging earnings to all-time lows. Its debt level currently sits at ~100.55% total debt to equity. So why do I consider this company undervalued and a buy nonetheless?

The retail grocery and grocery logistics industry is in a consolidation phase. The extreme competition, low barriers to entry and razor-thin margins are forcing mom and pop grocers to sell to much larger regional and national chains. Even worse with Amazon's (AMZN) acquisition of Whole Foods, even Amazon is stepping into the market.

SpartanNash in an attempt to stay alive and capitalize on this industry consolidation has gone on a

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in SPTN over 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.