2 Grocery Store Dividends to Buy and 1 to Avoid

Some of the best investments can sometimes be found right under your nose -- or in this case, right around the corner from your house. Great investments are often born out of necessity, and nothing screams of necessary products more than the grocery store.

Grocers often have relatively stable cash flow and many even pay out a quarterly dividend to shareholders. On the flip side, grocery stores also operate on razor-thin margins and have to be very careful when passing along price increases to their customers, as loyalty in this sector comes with a high price tag. After perusing the sector, two grocers stood out from the pack as safe choices to grow their dividends over time, while another grocer which appears safe on paper could have a hole at the bottom of its bag.

Kroger (NYSE: KR  ) -- trust it
Kroger, the parent company behind such chains as Fred Meyer, QFC, Ralphs, and Food 4 Less, is staring rising food costs directly in the eye and coming out victorious.

With arguably the strongest growth among its peers, in its latest quarterly filing Kroger detailed an impressive 4.6% jump in same-store sales. Kroger has been able to reduce energy and product distribution costs, allowing it to actually drop the prices on some of its products -- exactly the opposite of what some of its rivals are experiencing. Because of its ability to maintain and even drop pricing, Kroger's customers are proving more loyal than most other chains' patrons.

With the company focused on installing gas stations at many of its locations, Kroger is making the shopping experience a one-stop outing for families. It's no surprise, then, that Kroger has been able to grow its dividend annually by 10% over the past five years. Currently at 1.8%, Kroger's dividend may not be much to look at, but its growth is unparalleled in the grocery sector.

Ruddick (NYSE: RDK  ) -- trust it
Not all supermarkets need to be huge chain stores to make an impact on your portfolio. Larger chain companies Safeway (NYSE: SWY  ) and Winn-Dixie (Nasdaq: WINN  ) are struggling to maintain margins and grow same-store sales. But Ruddick, a little-known supermarket chain based in the southeastern United States, is rapidly growing its business.

In its most recent quarter, Ruddick announced a 4.4% increase in same-store sales over the year-ago period. This growth led to an 8.1% jump in total sales while management kept a watchful eye on expenses. The company's promotional activity is also spurring increased customer loyalty, which has translated into increased discretionary product purchases.

Ruddick's quarterly payout, much like Kroger's, may not seem worth more than a glance on paper at a 1.3% yield. But take into account that Ruddick hasn't dropped its quarterly payout since 1995 while its dividend has doubled in that time span, and I'm sold on the slow but steady growth of this company.

SUPERVALU (NYSE: SVU  ) -- avoid it
Going against the very compelling case fellow Fool Jim Royal made in favor of SUPERVALU last week, I see a drastically different outlook. This is one case where a large short ratio, currently 20% of the float, serves as a stern warning to future shareholders.

SUPERVALU is a work in progress, and for the most part, I prefer to avoid such companies in sectors with razor-thin margins. SUPERVALU's 2012 guidance calls for a 1.5% to 2.5% decline in same-store sales. Also, during its most recent quarter, gross profit dipped from the year-ago period and net cash flows fell to $245 million. Despite a plan to reduce debt, the company still carries $7 billion worth of crippling debt.

Even worse, SUPERVALU was forced to slash its dividend in half when its business turned unprofitable. Though it still yields over 5%, with cash being funneled to pay down debt and a strike looming in Southern California, don't look for that dividend to improve any time soon.

Foolish roundup
Supermarket consumers are fickle. Focusing on same-store sales comparisons and dividend growth to guide your selection process in the grocery sector could put you on the road to healthy profits.

What's your favorite company in the grocery sector? Share your thoughts in the comments section below and consider adding Kroger, Ruddick, and SUPERVALU to your watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of SUPERVALU. Motley Fool newsletter services have recommended buying calls in SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never requires a coupon.


Read/Post Comments (9) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 24, 2011, at 6:54 PM, crazyidiot wrote:

    Supervalu owns over 35 percent of the real estate that their stores sit on. Which has to be worth something for a stock price. Sales are going down but still on pace for over 40 billion EOY.

    During a recession people buy more groceries as opposed to eating at restaurants. It is also cheaper to walk or bike to the local grocery store.

  • Report this Comment On August 24, 2011, at 7:20 PM, crazyidiot wrote:

    They also own Flavorite. I mean who owns Flavorite?

  • Report this Comment On August 24, 2011, at 8:43 PM, ryandm wrote:

    SuperValu is turning things around quite well. Even with debt factored in, the stock is way undervalued. There is a huge focus right now on paying down debt, with plans to knock out an additional ~$500m by the end of this fiscal year. That alone raises the book value of this company significantly.

    Just recently, insiders purchased SVU stock on the open market. All I see for KR and RDK from insiders is selling.

    Also: Craig Herkert was on CNBC just the other day explaining that SVU is comfortable with the dividend.

  • Report this Comment On August 25, 2011, at 9:30 AM, kenjotto wrote:

    I don't think that a large short ratio is a compelling argument to not own a stock. If anything, it could be an argument to own. SVU has brought in a very competent management team with great experience. If they execute on their plans, which given their experience are probably conservative, then the resultant stock appreciation will cause a lot of short coverage. Plus, their changes in business model to engage consumers in hyperlocal stores makes a lot of sense. I think SVU is a compelling buy for a small percentage of someone's portfolio.

  • Report this Comment On August 25, 2011, at 10:25 AM, mikecart1 wrote:

    Supervalu is a low quality grocery chain. If you look at their adds, you can tell they don't take in to quality. Just a cheap cheap place. It reminds me of Shoppers Food Warehouse in the DC area. They all sell the same thing - food. But some are better than others in the cleanliness factor and in presentation. Kroger on the other hand has always been clean, bright, and they invest in their stores. You can often tell which grocery stores are good and which are bad by how much dirt and debris is in the entrance area. Same way you can tell that Target caters to a cleaner American by their shiny floors and much more organized layout. Safeway, Giant, Kroger, Giant Eagle and similar are at the top tier of grocery store chains for a reason. Supervalu sends me those smeared advertisements in the mail every week and there is one down the street. I have never stepped foot in one in my life!

  • Report this Comment On August 26, 2011, at 10:27 AM, kenjotto wrote:

    @mikecart1 --

    Great point, and no arguments there. But, in a time of possible re-recession (is that a word?) people tend to flock to the the cheap cheap places. I point to how the various "Dollar" stores have been stealing share from Walmart...who used to be the one stealing share from everyone else. If SVU can operate in this cheap environment, and keep the cash flow going enough to pay down their debt, their stock will have a healthy rebound.

  • Report this Comment On August 26, 2011, at 1:14 PM, jameslfool wrote:

    Great input by all who have posted but I am a bit confused. In this Fool article, I read Avoid Supervalu (SVU), and today I received my FoolWatchWeekly with the headline The Week's Top Story The Cheapest, Best Stock I See......and it is about Supervalu. Fool writes "Foolish bottom line...While not without its issues, SUPERVALU is cheap and solidly profitable. With a turnaround in progress, an industry veteran with a pedigree from the world's largest retailer at the helm, and a clear path to increase shareholder value through deleveraging, SUPERVALU is the cheapest, best stock I see." I take this as two different Fool positions thus my confusion. Aviod it or buy it?

  • Report this Comment On August 26, 2011, at 2:03 PM, stevec5792 wrote:

    @james The Fools regularly contradict each other when analyzing a particular stock. The net of it is to do your own due diligence and decide whether you want to invest in the stock. The article you refer to does say SVU has issues, so that implies to me there is a speculative bent to his opinion. For me, the 5+% dividend looks great but I'll have to do some research to determine for myself whether I want to hold this stock for the possible turnaround.

  • Report this Comment On August 26, 2011, at 2:11 PM, PeteysTired wrote:

    I have a Walmart Superstore, Target Superstore and Cub (SVU) with 5 miles of me. To describe how I think SVU will fare one only has to look at demographics. At Walmart and Target I see a mostly younger shoppers. At Cub, I mostly see older people pushing their carts. SVU is dying like their customer base....at least in my area. I wouldn't touch them.

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