Dividend Diplomats’ Recent Buy – Kroger Co. (KR)

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.

Why Kroger?

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.

Summary

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

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29 thoughts on “Dividend Diplomats’ Recent Buy – Kroger Co. (KR)

  1. Nice buy. Seems like KR is getting a lot of attention last week. Price dipped to a great entry point for most. I was torn between opening a position with them or adding to a current position. Went with adding a few more shares to GIS to lower my cost basis. Would love to buy some KR but need more capital. Maybe if the price stays low for a bit. Great buy!

    • Thanks Daze. We were pretty darn excited the day we purchased shares. That’s a tough call with GIS too. I wish there was enough capital to buy both companies, because I definitely would be. Lanny had GIS on his last watch list and had me interested in the company. Similarly, I only had enough cash for one, and KR won out. I don’t think you could have made a wrong decision between selecting from the two.

      Bert

  2. I recently did a blog post about Kroger on my blog as well.

    This might be a very timely buy given recent events.

    The stock looks oversold to me and there is some technical support at the $20 level.

    I wouldn’t be surprised if it creeped back up to $25, which would be a nice return.

    Is this is a long term buy for each of you? What is your exit strategy?

    • Very nice. I’m going to swing by later tonight and see what you have to say about KR. This is a long term buy for me, which is what made the purchase that much easier. I’m prepared to wait out the margin compression and the impact of the Amazon-Whole Foods merger. The dividend growth has been there and I am a fan of some of the acquisitions KR has made over the last few years. But in the short term, hopefully your hunch about creeping towards $25 is right!

      Bert

  3. I’m not familiar with Kroger as it is an US based company only. But do understand why you bought it.
    Most of the times, I’m a bit hesitant with brick and mortar only retailers, not because people won’t go there anymore. But because it’s difficult to get to a decent growth rate within that sector. I think this can really make a difference on Krogers part: “with the announced acquisition of tech & healthy”.

    Nice to see you guys made such a beautiful duo buy together, think that won’t be happening to often 😉

    • Divnomics –

      Yep, a nice chain-based grocery store with all of the programs to keep the customers hooked right in. Location is also critical to be in front of the masses of people, that’s for sure. The trades of Bert & I are rare when we are able to buy the same stock at the same price, glad we were able to. One dividend increase as a shareholder under the belt and looking to a few more.

      -Lanny

    • KR has a much larger network than I remembered, which was one of the great selling points for me. The more I dug, the more I liked about the company. Are you waiting for the company to hit a certain price before adding to your stake? Are you trying to sneak in before the upcoming ex-dividend date?

      Thanks for stopping by,

      Bert

  4. A very gusty move I would say. The organic food segment is under tremendous pressure. Too much competition. Added to it AMZN’s entry … I am just not comfortable purchasing KR. But, i agree the metrics though look enticing.

    • Yes – the metrics are there. Understandable why you may want to sit this out based on the news. There are plenty of other stocks out there to pick that may better suit your metrics and portfolio. Which ones are on your watch list?

      Bert

  5. As a Belgian, I have no experience with this company.
    I do understand that retail is under pressure right now. When you think the fundamentals are still ok, why not!

  6. Love the pickup long term. I myself used the opportunity to scoop up some Target. Whole Foods is a very niche market and I’m sure Amazon will face some growing pains as they jump in the grocery business.

    • Thanks John! I agree, it will take some time for Amazon to iron out the kinks of the acquisition. There are still a ton of Krogers in locations where there are not whole foods stores as well. I would add to Target, but I have a fairly large position in the company at the moment. Let us know if you add.

      Bert

  7. I think it’s a great addition. Looks like there’s a similar view behind this purchase why I’ve purchased TGT recently and why I’m still considering buying more. I think during the current sell off in retail there are some great buying opportunities and KR surely looks like one of these.

  8. Nice buys. I agree I think grocery especially will remain brick aNd morter. I have heard of Kroeger but being Canadian don’t know much. I also find grocery stores stocks in general are lower atm because of the yield. When the market pulls back ppl will jump back into defensive stocks. Nice work.

    • Thanks PCI! KR has a large footprint, but it is all in the US. Heck, we don’t even have Krogers here in Cleveland. The increasing yield was not the only reason we purchased the stock, but it put it on our radar. Then, the stock screener did the rest.

      Bert

    • Agreed – and hopefully we are right! The impact of the acquisition will take time and will not be felt on day 1. Marrying two business models like that is not an easy process, but I have confidence that Amazon will be able to pull it off!

      Bert

  9. Dudes,
    Great purchase, they were on my watch list before the fall, and now moved up a lot . KR owns more than just KR, they have a bunch of other stores. Some people believe AMZN and WMT will destroy grocery chains. To that I say go to WMT, see if they have the variety to make what you need every time. They don’t, not if you like to cook all sorts of food. And sorry AMZN, but I don’t want you delivering fruit to my door. You are not Harry and David, and one bruised / moldy peach would tell me all I need to know after the first drone food delivery. Plus, WFM is extremely overpriced in spite of the changes they have attempted to make. So I see these markets as related, but separate.
    – Gremlin

    • Thanks Gremlin. Glad we are on the same page here about Kroger and that you are watching them. You’re right, KR has done a lot over the years to expand their business model and the more I dug into it the more I liked. Agree about the delivery of fresh food. I have no idea how it will be pulled off and the quality will be consistent across the board. But I guess they are betting that it won’t be that difficult to figure out or people will overlook that for convenience. Time will tell!

      Bert

  10. I already had a small position that I bought at around $29 earlier this year. I added to it on the drop. If I’d have waited another day, I could have gotten it for even less. I think it will be a good buy long-term.

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