Should These 3 Grocery Stocks Fill Your Shopping List?

Published Fri, 01 Jul 2016 18:30 CET by

Grocery retailers have an average dividend yield of 3.54%, which is higher than the S&P 500 yield (2.17%). Normally, grocery retailers offer food, general merchandise, health and beauty care, and pharmacy products at competitive prices and their products are of superior quality aiming to attract and retain more customers. In the United States, the trends for the grocery store industry insinuate that consumers are looking for convenience, pushing retailers to expand and invest in fresh produce and foods.
This article discusses three grocery retailers, two large-cap and one small-cap, that trade on the NYSE and the Nasdaq. The small cap (Weis Markets) has outperformed the NYSE and its peers 10.67% YTD, whereas the two other companies have experienced losses YTD, like the NYSE Composite Index and the Nasdaq Composite Index. In addition, the small-cap carries no long-term debt at all and has the most balanced payout ratio (49%). All three companies have an average beta of 0.71, suggesting low risk, whereas their average dividend per share is $0.74, yielding 1.83% at an average payout ratio 36%.

The Kroger, Weis Markets and Whole Foods Market YTD Stock Performance Graph
The Kroger Co. (NYSE: KR) is a Cincinnati, Ohio-based food retailer. The Kroger serves retail food and drug stores, multi-department stores, jewelry stores, and convenience stores, offering natural and organic food, general merchandise, and fine jewelry as well as health and beauty care items. The company operates under the Fred Meyer, King Soopers, Kroger, Ralphs, Simple Truth and Simple Truth Organic brand names in a network of 2,778 retail food stores and 78 franchised convenience stores.

Q1 2016 Results: In the first quarter of 2016, The Kroger continued to implement its growth plan aiming to meet its financial goals by strengthening its customer relationships and growing its market share. The Kroger’s consistency in financial performance can be seen in its Q1 2016 results as follows:

  • Revenues reached $26.2 billion, up 3.8% YoY from $25.2 billion, generating a
  • Gross profit margin 22.8%, up 1.6% YoY from 22.5% in the same quarter last year
  • Total operating expenses grew 3.9% YoY to $25.2 billion from $24.3 billion, due to higher SGAs (+6.0%) and depreciation (+8.8%)
  • Operating income grew 1.8% YoY to $928 million from $912 million, generating a
  • Net income of $559 million from $518 million, a 7.9% YoY increase
  • Operating cash flow grew 175.4% YoY to $4.8 billion from $1.8 billion in the first quarter of 2015

Dividend Growth & Prospects: The Kroger implements a long-term financial strategy of using its operating cash flow to repurchase shares and fund its dividends. In the period 2013-2016, the company returned $1.3 billion to its shareholders in the form of cash dividends and $3.8 billion through share repurchases. On June 23, The Kroger declared a quarterly dividend of $0.12 per share, reaching an annualized dividend of $0.48 per share. The dividend yield is 1.31% at a payout ratio of 22%, in line with the average payout ratio 23.6% of the Grocery Stores industry. In addition, The Kroger has a dividend growth 84.6% or 8.5% annually between 2006 and 2016. Through 2020, analysts estimate an average EPS of $2.54, up 18.7% from current EPS of $2.14, and an average dividend of $0.48 per share, in line with current DPS. These estimates will generate a payout ratio around 19.0%. Additionally, average earnings growth is estimated at 9.53% annually.

The Bottom Line: The Kroger’s “Customer First” initiative includes low pricing, store quality and superior customer service and has helped the company to achieve its long-term success. The strategic investment with Lucky’s Market in April, a specialty grocery store chain focused on natural, organic and locally-grown products, is expected to add value to The Kroger. Lucky’s Market is aligned with the “Customer First” philosophy in providing fresh organic and natural foods to the customers.

Weis Markets (NYSE: WMK) is a Sunbury, Pennsylvania-based food retailer that engages in the sale of food in Pennsylvania, Maryland, New Jersey, New York and West Virginia. Weis Markets sells groceries, dairies, seafood, fresh produce, frozen food, pharmacy products, general merchandise items as well as health and beauty care products. The company goes under the Weis Markets, Weis, Weis 2 Go, Weis Gas-n-Go, Weis Nutri-Facts, Weis Wonder Chicken, and Price Freeze brand names and operates a network of 163 stores in Pennsylvania and neighboring states.

Q1 2016 Results: In the first quarter of 2016, Weis Markets delivered strong results due to an increase in frozen, pharmacy and fresh products revenues. The company continued its long-term investment in upgraded supply chain and store support efficiencies to deliver superior customer service and this was translated into its financial results. In particular, compared to Q1 2015, Weis Markets delivered the following Q1 2016 results:

  • Revenues $738.2 million, up 3.6% YoY from $712.4 million
  • Gross profit margin 28.1% from 27.4%, a 2.4% YoY increase
  • Total operating expenses $706.9 million, up 2.1% YoY from $692.6 million
  • Operating income $31.3 million from $19.9 million, a 57.5% YoY increase
  • Net income $20.1 million from $13.3 million, a 51.1% YoY increase
  • Operating cash flow $38.1 million, up 22.7% YoY from $31.0 million

Dividend Growth & Prospects: On April 21, Weis Markets declared a quarterly dividend of $0.30 per share, reaching an annualized dividend $1.20 per share. The dividend yield is $2.45% and the payout ratio is 49%, which is higher than the average payout ratio 23.6% of the Grocery Stores industry. Weis Markets distributes nearly 50% of its retained earnings to its shareholders in dividends and continues to seek investment opportunities. The dividend growth since 2000 is 11.1% or 0.7% annually.

The Bottom Line: Weis Market focuses on customer satisfaction, thereby delivering strong results. Although its dividend growth is not spectacular, the company is consistent in returning shareholder value and sustaining growth. Its operating cash flow is 1.9 times its net income, which is a positive indication of the company’s cash flow position and ability to generate dividend income. Weis Markets is a small-cap with a strong growth potential.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
The Kroger Co. 36.76 27.32 42.75 34.55% -14.01% 33.82 16.44 1.42 0.77 22%
Weis Markets 50.35 37.14 53.59 35.57% -6.05% 1.32 19.94 0.00 0.67 49%
Whole Foods Market 32.53 28.07 41.97 15.89% -22.49% 10.06 20.95 0.32 0.68 36%

Whole Foods Market (Nasdaq: WFM) is an Austin, Texas-headquartered food retailer that operates natural and organic foods supermarkets. Whole Foods Market offers fresh produce, packaged goods, grocery, frozen food, prepared foods, dairies, meat products, nutritional supplements, and household goods. The company’s network consists of 434 stores in the United States, Canada, and the United Kingdom.

Q2 2016 Results: In the second quarter of 2016, Whole Foods Market implemented a cost structure policy to deliver a strong EBITDA, $353 million or 9.5% of revenues, and capitalize on the strong pace that the food retailing is evolving. More specifically, revenues grew 1.8% YoY to $3.7 billion from $3.6 billion, generating a gross profit margin 34.9%, 2.0% lower than 35.6% in the same quarter last year. Total operating expenses grew 2.1% to $3.5 billion from $3.4 billion. Operating income dropped 2.4% YoY to $241.0 million from $247.0 million, and net income dropped to $142.0 million from $154.0, a 7.8% decline. On the upside, operating cash flow for the fiscal year 2015 reached $1.13 billion from $1.1 billion, a 3.8% YoY increase. [Whole Foods Market runs its fiscal year from to October 1st September 30th].

Dividend Growth & Prospects: On June 7, Whole Foods Market declared a quarterly dividend of $0.135, thereby reaching an annualized dividend of $0.54 per share. The dividend yield is 1.73% and the payout ratio is 36%, which is higher than the average payout ratio 23.6% of the Grocery Stores industry. Dividend growth since 2011 is 35.0% or 7.0% annually. Through 2019, analyst consensus estimates an average EPS of $1.69, up 13.4% from current EPS of $1.49 and an average dividend of $0.60 per share, up 11.1% from current DPS of $0.54. These estimates will generate a payout ratio around 36.0% in line with current payout ratio, demonstrating that Whole Foods Market maintains a stable percentage of distribution of its retained earnings to its shareholders in the form of cash dividends. Also, average earnings growth is estimated at 8.07% annually.

The Bottom Line: Whole Food Markets is one of the leading grocery retailers in the U.S. with strong brand recognition and high-quality standards. The company’s competitive pricing and opportunity to expand overseas will help Whole Foods Markets to anticipate the economic changes in the American economy and achieve a stronger business growth.

Stock name Dividend Yield
Whole Foods Market 1.84
Weis Markets 1.83
Kroger 1.45

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