Kroger Co. (KR) operates as a retailer in the USA. The company operates supermarkets, department stores, marketplaces and warehouses for price impact. Kroger is a dividend payer who recently raised quarterly dividends by 12.50% to 18 cents / share. This was the 14th consecutive year of annual dividend increases for the company.

Over the past ten years, Kroger has managed to increase its dividend by 12.60% on an annual basis.

Kroger increased earnings per share from 95 cents / share in 2008 to $ 3.27 / share in 2020. 2018 figures are adjusted to exclude profit from the sale of the Kroger convenience store business. The company expects to gross between $ 2.75 and $ 2.95 / share in 2021.

Last year was a nice increase in earnings as earnings per share hadn’t gone anywhere since 2015. This was due to future investments in the company’s business. It seems that revenues could decline in 2021 as fewer consumers stock up on goods like they did when the pandemic began.

Kroger’s financial strategy is to use free cash flow to drive growth while maintaining its current investment grade rating on debt and returning capital to shareholders. The company actively offsets using its cash flow to achieve these goals.

The grocery store is very competitive. Kroger competes against Wal-Mart and Target as well as against corner shops and Amazon. The company must continuously invest in business, drive efficient processes, new products and innovations (such as online and delivery / collection). Kroger has the volume of business to compete effectively and has attractive outlets as well. This enables the company to shop online and pick up at 57% of its stores and deliver 91% of customers to their homes. In 2018, Kroger invested in Ocado, the exclusive partner for the delivery of food in the USA. Ocado delivers groceries in Europe. Kroger has also invested in new warehouses, optimizing stores, expanding its own private label brands and digital products to drive long-term sales growth. The same in-store revenue growth and cost reductions are the drivers that will propel earnings per share growth over time.

Kroger also competes with a variety of private label brands that it owns and manufactures in-house. This makes it possible to achieve very good profit margins for these items compared to branded products.

Kroger also competes with pharmacies to order three-quarters of its stores and a gas station in more than half of its locations. Customers who fill out a prescription by coming to the store will likely make an additional purchase or two as well. The same goes for customers who would appreciate the convenience of buying gasoline, filling out prescriptions, and doing their shopping.

Kroger also plans to develop alternative sources of income using the data it collects on buyers and targets personal financial products and media advertising income. The company collects a lot of data about customers shopping there, which can also be used as a tool for a more personal shopping experience. Another alternative source of income is Home Chef’s meal delivery service, which provides meal ingredients in 48 states. Kroger acquired the chef in 2018 and the meal sets are available at Kroger locations including some Walgreen stores.

Kroger has amply rewarded shareholders with dividends and share buybacks. Between 2008 and 2020, the number of shares issued decreased from 1.31 billion shares to 781 million shares. This means that 2008 shareholders who remained invested in Kroger increased their stake in the company by two-thirds without doing anything.

The payout ratio rose from 17.90% in 2008 to 20.80% in 2020. A lower payout ratio offers a reasonable margin of safety for dividend payments that can protect against short-term turbulence in earnings per share. From here on there is room for an increase in the payout ratio. Future dividend growth can be supported by gradually increasing the payout ratio. However, if Kroger is unable to fuel earnings growth, there is a natural limit to further dividend growth. I would worry if profits don’t grow, but dividends, and the payout ratio top 60%.

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