The buying spree continues here on our website. What makes this one more fun, and we haven’t done this in a long time, is that the two of us purchased the same stock within minutes of each other. Lanny has been the most active of late and recently purchased shares in Cisco. Bert on the other hand, has been mostly on the sidelines since him and his wife purchased their first house. Last week though, we saw an opportunity that was too good to pass up and pounced. See why we each purchased shares of Kroger (KO) during their recent slide.
I think we are all pretty familiar with the two events that have hit Kroger over the past few weeks. First, let’s start with the company’s earnings release. This isn’t a shock to many, but the earnings release was not the best. The company saw a shrinking gross margin on their products and lowered their earnings guidance for the year from $2.21 – $2.25 to $1.74 – $1.79 (adjusted EPS of $2.00-$2.05 which includes a one-time charge). The sharp decline in earnings caused the stock to fall nearly 20% the date of the earnings release. However, reading the earnings release, the company still remains optimistic about executing their long term strategy of cutting costs, growing earnings 8%-11% annually, and returning capital to shareholders. The short term noise is there, but management still has a long term focus on the grocery chain. Still, even after the earnings release, we were not looking to buy immediately.
Second, heck, everyone knows about this event. A day after the earnings release, Amazon (AMZN) announced their acquisition of Whole Foods Market (WFM). The move caused grocers and retailers to slide, and the potential impact on the industry as a whole is still yet to be determined. After this slide, KR’s yield jumped well above 2%. This is when we became serious about purchasing shares of KR and quickly ran KR’s adjusted earnings through the Dividend Diplomats Stock Screener (we will use our purchase price of $21.00 per share for the purposes of the screener and the low end of the earnings guidance in the earnings release).
Metric #1 – P/E Ratio – ~12X – Pass, well below the P/E ratio of the broader market
Metric #2 – Payout Ratio – 27.5% – Pass, well below our 60% threshold.
Metric #3 – History of Growing Dividends – 10 consecutive dividend increase. The company is not an Aristocrat; however, since the company re-instated their dividend in 2006, the company has focused on continuing to increase their dividend. Last year they raised their dividend 14% and have a five-year average dividend growth rate of 16%. With management’s commitment to growing their dividend and the fact the company has increased their dividend for 10 consecutive years, we gave this metric a pass as well. Oh yeah, we also noticed KR increased their dividend by a little over 4% here in this past week of June. We did not expect results in line with their recent history, but will take the growth nonetheless!
Further, Kroger (KR) is a beloved grocery store, with almost 2,800 stores across the U.S. and even with the announced acquisition of tech & healthy – there will be, in my mind and for my grocery shopping experience – a need for brick and mortar grocers. Further, Kroger is one of those grocery stores that has more of a local feel than a big box grocery chain, it’s very interesting, actually.
So KR passed our stock screener with flying colors. We were comfortable with the yield given the price decrease. Our price targets were set. Now the fun part, each of us will dive into our separate purchase summaries.
Lanny’s Purchase of Kroger
I was excited and even though I haven’t fully finished paying off my auto loan yet, I still had capital that was ripe and ready. I wanted to strike and take advantage of this shake of Amazon (AMZN) & Whole Foods (WFM) and felt comfortable at $21.00 per share 0 which was 45% from their 52-week high and would mark 37.72% down for the year (with back to back massive down days in the double digits). You damn right better believe I decided to Just Go For It and make the quick decision to make every dollar count in this situation, and that I did. Bert and I were messaging eachother on the countdown to hit our limit order – it was the absolute highlight of our day – as we both had the trade at $21.00. The legit coutndown was happening by the penny. What’s funny – my trade hit quite a bit before Bert’s had gone through, in fact, after my purchase, the stock had a small blip up afterwards. I purchased 70 shares and at the prior year of $0.12 per share – this added $33.60 on a going forward basis and cost me at total of $1,476.95, plus commission, see below.
Bert’s Purchase of Kroger
While my purchase doesn’t pack the same punch that Lanny’s purchase, I was still able to scrape together enough cash to purchase 48 shares of Kroger, also at a flat $21.00. This purchase added $23.04 to my forward income, and hopefully this amount will increase slightly when Kroger announces their expected dividend increase towards the end of June. Man oh man does it feel great to be back in the game! This purchase was exciting though. Lanny’s purchase triggered first, and the price immediately jumped up above $21 per share. I was pissed off about the fact that my trade did not trigger and most of all, I was nervous that the price would continue to climb and my trade would never have triggered. Luckily for me, the company had one more dip in it. The price dipped below $21 one more time, my trade triggered, and then the rest was history. I was relieved that I was able to join in the fun.
While I, Bert, typically try to purchase shares in larger quantities, this is now the second stock I have started an entry level position with and have the plans to increase my stake in the company over time. Hopefully, I will be able to continue to add to my position over the next few months and slowly amass a larger position in my company. I understand the concerns that sent the stock price sliding over the last few weeks, a poor earnings release that showed a squeeze on margin and the sudden entry of a new competitor in the market that could potentially change the game in the industry, but the metrics are still sounds for Kroger and the company maintains a strong footprint throughout the country. Because of this, I am willing to take a flier on Kroger, build a position, and collect a yield over 2% along the way.
There we have it, the two of us added a combined $60+ to our forward dividend income figures in a matter of minutes. It is crazy how fast an investment decision can materialize, but that is why we have created a stock screener to help us efficiently assess if a dividend growth stock is undervalued. In the end, we were happy that we were able to get quality dividend stock at the price we wanted. We continue to focus on adding what we can, when we can, to push our portfolios forward. In this journey towards financial freedom, every investment and every dollar makes a huge difference and puts you that much closer towards the end goal. While there aren’t many Kroger (KR) stores in the Cleveland area, we look forward to shopping at Kroger when traveling for work to support our new dividend growth stock!
What are your thoughts about our purchase? Have you initiated or added to a position in KR since their share price fell? Or are you staying away from the grocery/retail industry until the dust settles? If not, what stocks are on your watch list instead?
-Lanny and Bert, The Dividend Diplomats