Kroger: A Slightly Elevated Price For A Good Company

Core Viewpoint - Kroger is a strong company with a solid dividend growth record, but the current valuation may not present an attractive buying opportunity given the recent price increase and ongoing merger uncertainties [3][9] Company Overview - Kroger operates stores across the United States and has a long history in the grocery industry, selling many products under its own label [3] - The company made a bid to acquire Albertsons for $24.6 billion in October 2022, but the merger is currently facing regulatory challenges from the FTC [3] Recent Financial Performance - Kroger's revenue has grown from $108.5 billion in 2015 to slightly over $150 billion in the latest annual report, with significant growth occurring between 2020 and 2023 due to inflation [4] - The most recent quarterly report indicated a revenue growth of only 0.5% year-over-year, excluding fuel sales, with full-year growth expectations between 0.25% and 1.75% [5] - Adjusted EPS for the year is projected to be between $4.30 and $4.50, up from $3.95 in the previous fiscal year [5] Debt and Merger Implications - Kroger's net debt has increased from approximately $11.4 billion to $19.3 billion over the past decade, which is manageable but may increase further if the merger with Albertsons proceeds [6] - The merger could create synergies and enhance negotiating power for lower wholesale prices, potentially improving profitability [6] Dividend Growth - Kroger has significantly increased its dividend from $0.35 per share a decade ago to $1.32, with an 11% increase in the most recent year [7] - The current dividend yield is 2.43%, which is higher than the S&P 500's yield of less than 1.3% [7] - The payout ratio has risen from less than 20% in 2015 to just over 38%, indicating a healthy level of dividend growth [7] Current Valuation - Kroger's share price has risen from around $44 to $52, with a peak of $58 earlier this year, leading to a current P/E ratio of 17.76, above its five-year median of 15.42 [8] - The uncertainty surrounding the merger and political pressures regarding price gouging could pose short-term risks to the company [8] Conclusion - Kroger is a resilient company with a strong history, but the current price may not offer the best entry point for new investors [9] - The company is expected to continue providing solid dividend growth, which may appeal to income-focused investors despite the current valuation concerns [9]