After a hiatus of a day since its earnings release on September 14, 2010, The Kroger Company (KR), one of the largest grocery retailers in the U.S., hit the market with the news of dividend increase, reflecting its plan to utilize its free cash to enhance shareholders' return, thereby boosting investor confidence on the stock.
The Cincinnati-based company, Kroger, raised its quarterly dividend by 10.5%. This is the fourth time the company has hiked its dividend since the inception of the program in 2006.
The board approved an increase in annual dividend to 42 cents a share (or 10.5 cents quarterly) from 38 cents a share (or 9.5 cents quarterly). The increased dividend will be paid on December 1, 2010, to stockholders of record as of November 15, 2010.
Another financial mechanism, which Kroger makes use of from time to time to create value for shareholders is the share repurchase program. The company's board of directors in June 2010, authorized the repurchase of $500 million of shares, to replace $225 million that was remaining under the $1 billion share buyback program, announced in January 2008.
During second quarter 2010, Kroger bought back 7.3 million shares at a price of $20.43 per share, aggregating $148.3 million. The company still has $409.2 million at its disposal under the new share repurchase program.
With signs of recovery in the economy, share repurchases and dividend increases have now become common trends among companies sitting on surplus cash. These strategies not only enhance shareholders' return but also boost earnings per share and raise the market value of the remaining shares.
Most recently, GameStop Corporation (GME), the video game and entertainment software retailer, notified that its board has approved $500 million in additional repurchase fund, of which $300 million will be utilized to repurchase shares and $200 million will be spent to buy back Senior Notes in order to lower its debt level.
Overall, we believe that Kroger's dominant position enables it to sustain top-line growth, expand store base and boost market share. Kroger's customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth.
However, the intensifying price war among grocery stores to lure price-focused consumers has compelled Kroger to cut prices, hurting its sales and margins. Consumers are trading down to cheaper substitute brands and shopping for groceries at low-price leaders such as Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST).
Kroger, which currently operates 2,468 supermarkets and multi-department stores in 31 states under approximately 24 local banners, has a Zacks Rank #3, which translates into a short-term ‘Neutral' recommendation, and is in line with our long-term Neutral rating for the stock.
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