Are These Dividends On Your Shopping List?

Shopping For Dividend Paying Stocks In The Grocery Aisle

 

As you know, I think that dividend investing does not have to be hard. If all you did was simply look around at the products in your home or where you shop on a regular basis, you would have found the basis for an investment thesis. With that being said, I’d like to take a look at the supermarket and grocery store industry and see how some of these companies stack up from a dividend perspective. After all, everyone of us shops at some point in a week or month at one of the major supermarket chains.

 

By any measure the supermarket/grocery store industry is huge. According to FMI research that monitors the supermarket industry, annual sales for 2013 topped $620 billion. This sector alone employs well over 3 million people and has a large real estate footprint with over 37,000 stores. No wonder some of the hottest names in this sector continue to make headlines as their growth and dividend payments continue to impress customers and investors alike. Let’s examine some of the larger more well known supermarket stocks.

 

First up, Safeway Inc. (SWY). Operating under their namesake as well as Vons (recently sold this summer), Pavilions, Randalls, Tom Thumb, and Carrs Quality Centers, SWY also sells a number of consumer products under the labels Rancher’s Reserve, Lucerne, Eating Right, mom to mom, Bright Green, Open Nature, Refreshe among many others. Currently yielding a decent 2.70% with a relatively high payout ratio of 83.6% based on current cash flow, SWY has been paying dividends for over a decade and has a five year annualized dividend growth rate of 19.5%. For those looking for some fast dividend growth this might be a stock to consider, though the high payout ratio might inhibit future high dividend increases. According to Morningstar the current PE of SWY stands at 76.3 highlighting the fact that share price has definitely run ahead of earnings. This makes SWY quite pricey relative to industry peers and the S&P.

 

Next on our shopping list is The Kroger Co. (KR). Operating under their namesake as well as Dillons, Food 4 Less, Fred Meyer, Fry’s, Harris Teeter, QFC, Ralphs, Smith’s and more, KR currently yields a relatively low 1.30% with an equally low payout ratio of just 20.1% making this dividend quite safe based on current cash flow. KR has been raising its dividend for the past five years and has an annualized dividend growth rate of 12.26%. On a valuation basis KR has a PE of 17.98 putting it in line with the S&P but well above industry peers. Forward PE looks slightly better at 16.0.

 

Moving down the aisle we come to the very popular supermarket chain Whole Foods Market, Inc. (WFM). Known for its large selection of fresh and organic produce and consumer goods, WFM currently yields a low 1.30% with a moderately low payout ratio of 31.4% making this dividend safe based on current cash flow. Though not a high dividend raiser like SWY or KR, Whole Foods Market still sports a five year annualized dividend growth rate of 5.92%. Not too bad considering the growth and capital appreciation the company has been experiencing the last decade. Like the two companies mentioned before, WFM on a PE basis alone, looks a bit expensive. The current PE of WFM is 26.11 which makes it relatively more expensive than the market and industry peers. Sometimes, you have to pay up for continued growth as WFM still has room to increase its footprint.

 

Finally, let’s take a look at a smaller market chain named Casey’s General Stores, Inc. (CASY). For those who are not familiar with this chain, CASY operates convenience stores primarily Iowa, Missouri, and Illinois. Though not a traditional big box supermarket it does sell many of the same consumer goods found in those types of stores such as beverages and tobacco products, health and beauty aids as well as an assortment of prepared foods such as pizzas, donuts and sandwiches. CASY currently yields a relatively low 1.20% with a low payout ratio of 22.5% which leaves plenty of room for dividend payments and future increases based on current cash flow. It has been raising its dividend for the past eleven years and has an impressive five year annualized dividend growth rate of 19.77%. On a valuation basis CASY has a current PE of 20.51 which is not too bad when comparing to some of the other stocks mentioned above. For those willing to invest in slightly smaller regional chains CASY might be an interesting pick as it continues to grow its dividend.

 

Do supermarket dividends belong in a dividend growth investment portfolio? Are any of the names mentioned above in your portfolio? Please let me know below.

 

Disclosure: Long NONE

18 thoughts on “Are These Dividends On Your Shopping List?

  1. Interesting prospects DivHut. I have bought grocery operators before, when i perceived them to be at a substantial discount to their present value…….but as a whole the industry has suffered massive margin contraction. Casey’s is a different animal, but do you feel that the other grocery operators have brighter futures? What would be the catalyst?

    I have some thinking to do. Have a great weekend
    -Bryan
    Income Surfer recently posted…Why My Paycheck Fails to Satisfy, and a Weekly UpdateMy Profile

    • Hi IS,

      The grocery business is a challenging one at best. With thin margins to start with and contraction, as you mentioned, I can see why most might be down on the sector. Nevertheless, it seems that a shift in the industry is occurring with the likes of “newer” market entrants such as Whole Foods, Trader Joe’s, Sprouts and more that are creating a different category within the sector. These markets are expanding rapidly while the larger traditional supermarket chains seem to be going through a massive consolidation with KR and SWY buying up smaller chains. You can draw parallels with the airline industry how after years of poor performance, consolidated, reduced capacity and started to think differently by offering many services a la carte. Today, many are flying high. I guess time will tell where the industry ultimately heads as Amazon Fresh and others enter this space as well. Thank you for your comment and question.

  2. Subscribed to the Motley Fool last year and one of the purchases that I made was WFM. Been a rough one to hold as the price fell from the mid-50s down into the 30s. That said, I believe that the long term prospects are good, growth should be solid, and the dividend (though small) would make this a good pick at today’s price for someone willing to weather the ups-and-downs. I recently doubled down. Just wish I had waited for a better entry price (MF isn’t big on that, just solid growth companies with excellent management).

    Here in metro Detroit, KR seems to be getting it’s act together. Meijer’s is the grocery store of preference for a great many people here, including my wife and oldest daughter. Unfortunately for us, Meijer’s is family owned and there is no indication that they will be going public anytime soon, if at all. Another one of those companies like Mars that would be on my wish list if they ever have a stock offering.

    • Hi KeithX,

      WFM seems to be the go to stock in the industry as it seemingly grew from out of nowhere to take on the big box stores KR and SWY. WFM still seems like it is poised to bounce back from its lows and at least from a dividend perspective the distributions seem to be quite safe with room for future growth. I know MF may not always deem an entry point as the most important metric when gauging a stock but I would disagree. Buying a seemingly great stock at a lousy price does affect total returns. But, in your case, as long as your investment thesis remains unchanged and you still believe in the company you invested in, stick with it and average down.

      I have never seen a Meijer’s but from your description it certainly seems like the place to go for groceries. I wonder how KR and SWY see the smaller competitors in their landscape. As I mentioned to Income Surfer, I feel that the industry as a whole is going through a major consolidation phase with many chains being gobbled up by the larger ones. Similar to what happened in the airline industry. I guess we’ll have to wait and see. Thank you for commenting.

  3. Have not make any look at this sector, the yields looks quite low for me. But this is something i need to keep my mind when i got everything else that i want to own.
    Thank you for this post!.

    cheers
    Anha
    AnhaInvesting recently posted…Recent BuyMy Profile

    • Hi AnhaInvesting,

      While the yields might be low for the companies mentioned, you cannot ignore the very fast dividend growth rate for each. Investing for dividends should be looked at two different ways. First, current yield and second, dividend growth rate. Anytime you have a long term stock that is growing a dividend by double digits for years, you would have found a great investment. Thank you for stopping by.

  4. I was looking at grocery store stocks a few months ago but decided not to purchase any. The grocery store sector is super competitive so the profit margin is getting slimmer and slimmer. Having said that, Whole Foods Market does look very interesting. Every time I go to a Whole Foods store it’s always packed. WFM is more targeted toward specific type of shoppers that don’t mind paying extra for organic food items so maybe WFM can stay more profitable compare to more general stores like Safeway.
    Tawcan recently posted…iPhone 6 craze – does it make sense?My Profile

    • Hi Tawcan,

      While I do not have any supermarket stocks in my portfolio either, I have to agree that WFM looks like an interesting play. It has a large and growing customer base and seems to have a pretty dividend friendly policy with a low payout ratio that has room for future increases. The sector doesn’t really fit my profile for long term dividend investments but still I thought it was an interesting space to profile. WFM seems to be more nimble than SWY or KR but it is those companies that are buying up many smaller regional markets to grow their overall base. Thank you for stopping by and commenting.

  5. A while back, I had considered buying some Safeway. At the time its dividend was north of 3.5%, but after looking at the various payout ratios, it never got passed my initial screening. The dividend yields of the others have kept those off of my radar (above 2%). In general, I don’t like retailers that sell only one item type (i.e. food, electronics) and would prefer to own more diversified sellers (WMT) and the makers of goods (GIS).

    I think there is some growth (value and dividend) to WFM. The desire to eat organic continues to grow. However, that space seems to be getting more and more crowded, at least where I live you have a half dozen chains selling local/organic produce. Plus those stores are very expensive compared to Safeway for example.

    Food for thought though!

    Take care!
    ILG recently posted…Recent Purchases: Sept 9th to 18thMy Profile

    • Hi ILG,

      There’s no question that this sector is highly competitive and known for razor thin margins of around 1%. From the companies mentioned I have to agree with your assessment that WFM seems to be the best pick from the bunch as they are riding the wave of people wanting more natural and organic foods. The same parallel can be drawn with the recent troubles MCD is facing when compared to CMG or PNRA as tastes change for consumers. I realize that many dividend investors might not even consider these names because of the relatively low yields. But you cannot discount the high dividend growth rate either. Thanks for stopping by and sharing your thoughts.

  6. DivHut,

    Been reading your website now for a while and I just wanted to comment that I really like your sector / industry specific articles. I find them as a whole very informative. I would think that KR is the buy for me since I mostly shop at one of their Harris Teeter’s. The grocery market industry as a whole looks to have a few good values in it, probably not the best right now, but its nice to know good value can be found here.

    – Dividend Gremlin

    • Hi DG,

      I’m happy that you find my industry specific articles informative. The way I see it, dividend investing doesn’t have to be hard if you simply look around and see where you shop and what you buy. Solid dividend paying company products are all around us and are used daily.

      The supermarket industry, as a whole, is super competitive as margins are notoriously thin. That being said, a great consolidation is occurring in recent times as many larger chains, KR and SWY are buying up smaller regional chains such as Harris Teeter’s as an example. While an interesting sector to consider investing in, as literally millions of people shop in these retail outlets, be careful not to overpay for a stock and watch for their valuations. Thank you for stopping by and commenting. Much appreciated.

    • Hi DD,

      Yes, this past summer Albertson’s bought SWY for $9.2B. The merger creates the second largest grocery store chain behind KR. It is too early to see how this merger will impact the earnings of Albertson’s and whether or not we’ll see some major consolidation in the sector as well. Thanks for the great question and comment.

  7. Great post, I had forgotten about the grocery sector. I remember when I was looking at KR & WFM, a few months back both seem to have good results with WFM poised to grow more, thus taking a larger share of the market. I’ve watched how WF has grown in popularity and they’re opening new stores, so that looks good. What I had not thought of was the fact that the dividend rate for these companies can indeed increase as well. Thanks for posting this and reminding me!

    – HMB

    • Hi HMB,

      Glad you enjoyed the post and was reminded about this sector. I know it is a highly competitive sector with very small margins but as a whole it’s a sector that commands a huge amount of annual sales. WFM is a definite grower and the other major market players seem to be going through a consolidation phase as the Albertson’s buyout of SWY just occurred and KR is buying up many regional markets as well. There could be some interesting dividend and capital appreciation plays in this space. Thanks for stopping by and commenting.

  8. Hey Keith,
    I was looking at Whole Food seem like a good bargain since their stock got pretty much pummel. The dividend/yield is a bit low, but does have some potential. The P/E is also high but I will continue to monitor this stock. I have shop at both kroger and safeway before, but have never look at their stock.

    • Hi J,

      WFM is the company with the fastest growth prospects. KR and SWY (now Albertson’s) are buying up a lot of smaller regional chains and will no doubt change the supermarket landscape as they consolidate many of their stores. It’s a tough industry to be in for sure but when the stocks are priced right you can get some nice capital appreciation coupled with dividend payments while you wait. Thanks for stopping by and commenting.

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