Dividend Seekers: Put This Stock on Your Shopping List

Zain Akbari: Currently at a roughly 3% dividend yield and about a 20% discount to our $27.50 per share valuation, we think dividend investors should consider narrow-moat Kroger despite ongoing concern about traditional grocers as their digital rivals grow. We believe Kroger is different from its pure-play peers in that it should be able to use its scale, customer insights, and strong private-label offering to successfully complete its transformation into an omnichannel grocer. While competition should remain fierce as Amazon expands its grocery offerings, Walmart executes its own digital strategy, and hard discounters Aldi and Lidl expand in the United States, we expect Kroger can use its cost leverage to meet downward competitive price pressure while maintaining margins. Fairly steady profitability against low-single-digit top-line growth should allow the company to maintain its streak of 13 consecutive years with dividend increases, most recently continued by Kroger's move to raise its payout by about 14%, to an annualized 64 cents, starting with the planned September payment. Our forecast assumes mid-single-digit dividend growth over the next decade, somewhat slower than the last 10 years' low-double-digit clip, with Kroger distributing roughly a quarter of its earnings annually. Particularly as we believe Kroger's investments to build its omnichannel presence will ebb slightly as a percentage of sales and as store growth should not be a major part of the story, we believe projected cash flows provide a significant margin of safety around the dividend while also allowing the firm to continue share repurchases. Although acquisitions could cause Kroger to deviate from our forecasts, particularly as it looks for partners to build its omnichannel presence and develop new ways to monetize its customer insights, we expect the firm to continue to focus on steady, though admittedly not outlandish, dividend growth in the years to come.