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When Others Are Cutting Dividends, This Company Is Raising Its Payout

Published Mon, 29 Jun 2020 11:50:18 on Income Investors

Kroger Co Is a Solid Dividend Growth Stock
For many dividend investors, the past few months haven’t been easy. Although the stock market has been quick to recover, the impact from the COVID-19 pandemic was still felt by numerous companies, and some industry leaders have even announced dividend cuts.
No one likes dividend cuts. The good news is, not every company is in the doldrums. Kroger Co (NYSE: KR), for instance, has just announced a double-digit percentage dividend hike.
On June 25, Kroger’s board of directors approved an annual dividend rate of $0.72 per share, up 12.5% from the prior annual dividend of $0.64 per share. The new dividend rate—which translates to $0.18 per share quarterly—will start with the September 1 payment. The ex-dividend date is set to be August 13. (Source: “Kroger Board of Directors Raises Quarterly Dividend 13 Percent,” Kroger Co, June 25, 2020.)
“Kroger’s 13 percent dividend increase reflects our ability to deliver strong free cash flow during uncertain times and throughout the economic cycle,” said Kroger’s chairman and chief executive officer Rodney McMullen. (Source: Ibid.)
The announcement can be considered the latest sign of strength for the company. Kroger is the largest supermarket company in the U.S. by revenue, and the second-largest general retailer in the country, only behind Walmart Inc (NYSE: WMT).
The neat thing about Kroger stock is that, even if the economy slows down, people still need to buy groceries. In other words, Kroger’s business is essentially recession-proof. Just take a look at the company’s first-quarter earnings report and you’ll see what I mean. Note that Kroger’s first quarter of 2020 ended on May 23, so it included a lot more impact from the COVID-19 pandemic than a quarter that ended on March 31, 2020.
In its first quarter, Kroger generated $42.0 billion of sales, representing a 13.5% increase year-over-year. Excluding fuel, the company’s sales surged 19.1% in that period. Notably, the retailer’s sales in digital channels grew 92% year-over-year. The company now has more than 2,000 pickup locations and 2,400 delivery locations, reaching 97% of its customers. (Source: “Kroger Reports First Quarter 2020 Results and Provides Update on COVID-19 Response,” Kroger Co, June 18, 2020.)
At the bottom line, Kroger earned adjusted net income of $1.22 per share in the first quarter. Again, this marked a substantial improvement because, in the year-ago period, its adjusted earnings was $0.72 per share. And considering that the company declared a cash dividend of $0.16 per share during the quarter, the payout is more than safe.
In April, Kroger issued a business update in response to COVID-19. In particular, the company projected greater than 2.25% growth in identical sales without fuel, $3.0 to $3.1 billion in adjusted operating profit, $1.6 to $1.8 billion in adjusted free cash flow, and $2.30 to $2.40 in adjusted earnings per share (EPS) for full-year 2020. (Source: “Kroger Provides Business Update Related to COVID-19,” Kroger Co, April 1, 2020.)
In its latest earnings release, the company did not reaffirm or provide a new guidance for 2020, due to the current uncertain environment. But management did say that they expect to “exceed the outlook shared in our April 1 business update for identical sales without fuel, adjusted [First-In First-Out] operating profit, adjusted EPS and adjusted free cash flow.” They just don’t know the extent of the potential upside. (Source: Kroger Co, June 18, 2020. op cit.)
Bottom Line on Kroger Co
With KR stock trading at $32.71 per share, the newly increased payout gives the company an annual dividend yield of 2.2%.
Sure, there are companies with much higher yields, but keep in mind that Kroger stock has a solid track record of boosting its dividend on a regular basis. The company has raised its per-share payout every year for 14 consecutive years. (Source: “Dividends,” Kroger Co, last accessed June 25, 2020.)
And because Kroger’s business is still growing despite the pandemic, it should have no problem continuing that track record. That means, if an investor purchased KR stock today, they could expect to earn a higher yield on cost in the future.
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Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
KROGER 25.59   11.2 2.28 0.64 2.48
WAL-MART STORES 116.92   26.3 4.44 2.12 1.83

KROGER - KR
KROGER - KR  


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