If you're looking for income from your investments in the stock market, Kroger (KR 0.36%) is a great long-term bet. Not only does it sport a meaningful dividend yield today, but Kroger's dividend payouts have been increasing for years -- and management expects this trend to continue.
Better yet, Kroger stock has fallen 19% in the past 12 months, making it more enticing. Here's a look at Kroger stock's dividend, and why now may be a good time to buy.
Kroger's most recent dividend increase was announced in June, alongside an incremental $1 billion authorization to its existing share-repurchase program that has impressively helped Kroger repurchase nearly half of its shares since the beginning of 2000. Kroger increased its regular quarterly dividend from 12 cents to 12.5 cents, or from $0.48 to $0.50 on an annual basis. The change to Kroger's dividend marked a 4.2% increase, bringing its five-year average annual increase to 15.9%.
There are several reasons for investors to expect more dividend increases from Kroger down the road. First, Kroger's strong track record of historical dividend growth shows that regular increases are a priority for Kroger's board. Second, management explicitly said in its announcement about its most recent dividend increase that it "continues to expect an increasing dividend over time." Last, and most importantly, Kroger's payout ratio, or the percentage of earnings it is paying out in dividends, of just 20% leaves plenty of room for dividend growth. In comparison, consider Wal-Mart's significantly higher payout ratio of 54% even though the retail giant's 2.1% dividend yield is only slightly higher than Kroger's 1.9% dividend yield.
A good time to buy?
But is it really a good time to buy Kroger stock? After all, there must be a reason it's trading lower. While Kroger's lower price can be attributed to some extent to lower food prices and a deceleration in same-store sales growth amid heightened competition earlier this year, the price decline was in large part a result of worries about Amazon.com's (AMZN 0.73%) foray into the grocery business with its acquisition of Whole Foods. When the acquisition was announced, Kroger stock fell 17%. After the acquisition, Whole Foods immediately cut prices on many of the staple foods it sells, leading investors to fear Amazon's market-share-hungry e-commerce tactics could find their way to the grocery business and ultimately weigh on Kroger's profitability.
But concerns about Amazon's impact on the market are likely exaggerated. Kroger has thrived since Amazon acquired Whole Foods this summer. Indeed, Kroger stock jumped 6% after the company released its third-quarter results for fiscal 2017 at the end of November. The quarter highlighted a 4.5% year-over-year increase in revenue and 1% same-store sales growth when excluding fuel. Meanwhile, earnings per share jumped 7.3% year over year.
Also notable, Kroger's digital efforts are paying off, with digital revenue increasing 109% year over year thanks primarily to Kroger's success in its personalized online ordering service, ClickList. Comparatively, Wal-Mart's e-commerce sales grew a lesser 50% year over year in its most recent quarter.
Thanks to Kroger's sell-off following the Amazon acquisition this summer, the stock trades at a much more conservative valuation of just under 16 times earnings, well below Wal-Mart's price-to-earnings ratio of 26. Before Amazon announced its acquisition of Whole Foods, Kroger sported a price-to-earnings ratio above 18.
With its conservative valuation, solid fundamentals, promising dividend growth, meaningful dividend yield, and low payout ratio, Kroger will likely reward dividend investors handsomely over the long haul.