Mid-2015 was a high-water mark for brick-and-mortar retail shopping destinations like CVS Health (NYSE:CVS) and Kroger (NYSE:KR). Since then, however, shareholders don't have much to show for their gains. While the market has surged over 30% since then, each of these two stocks has lost over 30%.

Given that both have significant presences in the United States, you might believe that one (or both) could be a great buy at today's prices. But between the two, which is better? And is either one worth your investment dollars?

A female pharmacist with a clipboard looking at shelves of medicine.

Image source: Getty Images

Obviously, there's no way to know for sure how any individual stock will do in the future. But we can compare these two looking through three different lenses to get a better idea of what we're paying for when we buy shares and see which is the better bet.

Sustainable Competitive Advantages

We'll start with the most important of all the variables: a company's sustainable competitive advantages, or its moat

We'll start with Kroger. The grocer, which operates under a number of different chain names including Kroger, Harris Teeter, and The Fresh Market, has been a major player in the industry consolidation of the past five years. For a while, that and a highly successful private label organic brand were huge boons for investors. 

But the industry has been on edge ever since the announcement that Amazon was buying Whole Foods. Because just about anyone can sell food, the only real moat that a grocer has is the value of its brand. And while many of the names under the Kroger banner are valuable, the power of brands has subsided greatly as Millennials have become the dominant spenders in today's economy.

Today's shoppers either want to buy from small, local and organic brands -- most of which do not come from publicly traded entities -- or they want the lowest price and the most convenience. If Amazon is able to leverage its e-commerce lead and the network of fulfillment centers it has for quick delivery, Kroger could be left on the outside looking in.

CVS Health, on the other hand, has become a much different player than it was fifteen years ago. The 2007 acquisition of pharmacy benefits manager (PBM) Caremark Rx cemented CVS' place in the pharmaceutical value chain. And the company -- along with many other players in the industry -- has been working to vertically integrate itself. Late last year, CVS management announced that it had agreed to acquire health insurer Aetna (NYSE:AET) for $69 billion. As fellow Fool Keith Speights has laid out, the impetus for the move is the same competition that Kroger is facing: Amazon.

Because the pharmacy side of CVS' business provides the lion's share of profits, as opposed to the sodas and snacks you can also buy while there, CVS is looking to widen its moat as much as possible. The synergies between Aetna and CVS -- which could lead to cost-cutting, increased profitability, and locking health insurance customers into using CVS rather than Amazon -- do just that.

While the merger is far from a done deal, the company still has a wider moat thanks to the sticky nature of pharmacy visits and long-term contracts in place to serve those customers.

Winner = CVS Health

Financial fortitude

When it comes to financial fortitude -- which means a company's cash, debt, and cash flow -- organizations can fall into one of three categories: the fragile, which break easily; the robust, which remain the same; and the anti-fragile, which actually grow stronger in difficult times. For a more detailed breakdown, see this previous piece

When comparing these two, it's important to remember that CVS has a market cap over three times the size of Kroger's.

Company Cash  Debt Free Cash Flow
CVS $42 billion $62 billion $4.9 billion
Kroger $0.35 billion $12 billion $0.6 billion

Data source: Yahoo! Finance. Cash includes long and short-term investments. Free cash flow presented on trailing twelve-month basis.

CVS's cash and debt loads ballooned last quarter as the company prepared to free up the necessary resources to complete the Aetna merger. Given the strong free cash flows that the company has and its modest leverage, I believe it is on much stronger financial footing than Kroger.

Kroger not only has over 30 times more debt than cash on hand, but its free cash flows aren't all that impressive relative to the company's market cap. If a recession hit -- or Amazon were able to quickly steal away market share via e-commerce deliveries -- Kroger's history of financing acquisitions could come back to bite it.

Winner = CVS Health


Finally, we have valuation. This is far from an exact science, so we can consult a number of different variables to discern which is the better bet at today's prices.

Company P/E P/FCF PEG Ratio Dividend FCF Payout
CVS  10 13 0.8 3.1% 42%
Kroger 12 33 2.1 2% 73%

Data source: Yahoo! Finance, E*Trade. Non-GAAP earnings used to calculate P/E when applicable.

Here again CVS is the clear winner. Not only is it cheaper on every metric, but it also offers a dividend yield that is 50% higher than Kroger's, and the payment of that dividend eats up less of the company's free cash flow than with Kroger. That not only means that the dividend is safer in times of economic crisis, but that it also has more room for growth.

Winner = CVS Health

And my winner is...

As you can see, CVS is the runaway winner of this competition. While both of these companies will have to fend off Amazon in the coming decade, CVS is in a much stronger position to do so. It has the financial resources to put up a battle, and its attempts at vertical integration give it a wider moat.

While I don't own shares of either company -- admittedly because I believe my largest personal holding, Amazon, is in the most powerful position -- I think the depressed stock price of CVS is attractive enough to give the company an "outperform" rating on my CAPS profile.