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What Is Ahold Going To Do With 3.8 Billion In Cash?

|Includes: Koninklijke Ahold Delhaize N.V. ADR (ADRNY)

Koninklijke Ahold N.V. is sitting on almost € 4 billion ($ 5.4 billion) in cash, according to Ahold's 2013 Half-Year report. Total cash and cash equivalents are up € 2 billion ($ 2.7 billion) as a result of the sale of the stake in Scandinavian retailer ICA. Total net debt amounts negative
€ 813 million ($ 1.1 billion). Ahold is still figuring out what to do with their overflowing cash position.

In March 2013 Ahold announced a 500 million share buyback program on top of a 10% increase of annual dividend. Total dividend now stands at € 0.44 ($0.59) or 3.14% per share. On August 22, 2013 Ahold increased the amount of the buyback program to 2 billion, to be completed by the end 0f 2014. According to the most recent share buyback update date October 28, 2013 45.5 million share were repurchased for € 561.5 million ($ 758 million) or 28% of the total share buyback program.

Still the increase in dividend and the share buyback program is not enough for Ahold to resolve the overflowing cash position. In 2012 total free cash flow amounted € 1.2 billion ($ 1.62 billion). Total dividend payments of € 457 million ($ 616 million) and expected share buyback of € 800 million ($ 1.08 billion) does not significantly reduce cash and cash equivalents, therefore Ahold is looking for alternatives to give back more to shareholders. In my opinion Ahold has three valid possibilities to achieve their goal to return more cash to shareholders. I will discuss the three possibilities below.

1. Extend and increase existing share buyback program

The first possibility is to extend and increase the existing share buyback program. Most likely is an extension of one year and an increase between € 1 billion ($ 1.35 billion) and € 2 billion ($2.7 billion). Shareholders will appreciate increasing share buybacks this will be a driving factor for the share price in upcoming years from now. On the other hand shareholders have to wait several years before the company has returned most of its cash to shareholders.

Given the performance of the stock year-to-date, the stock is up almost 40%, extending and increasing the share buyback program looks expensive at this point. If Ahold decides to increase existing share buyback program this implies management opinion that the company is undervalued or at least fairly valued at this moment.

2. Acquisition of new business in the United States

Second possibility is the acquisition of a new business in the United States. The United States is an important market for Ahold. However, the company is only present in al small part of the United States. It seems to be a logic step to expand presence in the United States. Acquisition of new business will potentially increase free cash flow in the long term, which will lead to higher dividend payments in the future.

Ahold was named as one of the possible candidates to acquire Harris Teeter, but eventually Kroger acquired Harris Teeter. This may looks like a missed opportunity for Ahold, but it also shows Ahold's discipline when it comes to acquisitions. A large acquisition in the United States is unlikely; given the fact that Ahold had some problems with large acquisition in the United States in past and there are not many potential candidates available at this moment.

3. Declare a one-time special dividend

Third and by far the simplest way to return cash to shareholders is the declaration of a one-time special dividend. The amount of the special dividend most likely will be between € 1 billion ($ 1.35 billion) and
€ 2 billion ($2.7 billion). Shareholders would love cash in their pockets. A disadvantage of a one-time special dividend is the lack of potential to grow future free cash flow per share and is expected to be neutral for the share price in the long run.

Ahold announced the company has the overflowing cash position under review. The market expects an update in the fourth quarter of 2013. Given the three possibilities disclosed above it is my opinion Ahold is most likely to declare a special dividend in the low-end of the € 1 billion ($ 1.35 billion) and € 2 billion ($2.7 billion) range. This will be enough to resolve the negative net debt position and still gives Ahold enough cash to look for attractive acquisitions and investments or increase annual dividend and/or share buyback program in the future.

Disclosure: I am long AHONY.