While a pullback in the stock market uncovered some good investment opportunities last December, that steep market sell-off is now in the rearview mirror. The S&P 500 has surged 11% higher year to date, making it more difficult to find undervalued stocks.
However, there's still value in this market if you look closely. Better yet, one particular company not only trades at a conservative valuation, it also pays out a meaningful dividend. What is this stock? Grocery giant Kroger (KR 0.74%).
Here's why investors should consider buying Kroger stock.
Image source: Getty Images.
An attractive valuation
A look at Kroger's fundamentals relative to its market capitalization reveals a compelling valuation.
Consider Kroger's market-capitalization-to-operating-income ratio of just 10.2; this is much lower than Walmart's (WMT 0.08%) 14. There's a similarly large difference between the two companies' price-to-earnings ratios when earnings are adjusted to exclude non-recurring items. Kroger has a price-to-adjusted earnings ratio of 12.5, and Walmart's is 19.
Sure, Kroger doesn't deserve to trade at a significant premium. Its third-quarter net sales when adjusted to exclude fuel and the impact of divestitures and mergers only increased 1.7% year over year. But shares still seem undervalued. Kroger's financial discipline and its initiatives to streamline operations have notably helped adjusted earnings per share rise at an impressive clip. Third-quarter adjusted earnings per share rose 9% year over year. Even more, trailing-9-month adjusted earnings per share for the period ending on Nov. 10, 2018, gained even faster, rising 16% compared to the same period in 2017.
Finally, there's Kroger's solid trailing-9-month same-store sales growth of 1.7% when excluding fuel sales and the company's 60% year-over-year growth in third-quarter digital sales -- e-commerce growth that outpaces even Walmart's.
A robust dividend
Kroger's valuation looks even more enticing when investors consider the company's strong dividend.
The grocer recently put the accelerator on its dividend, giving it a 12% boost last summer (up from a 4% increase in 2017). Paying out $0.14 per share to shareholders every quarter, or $0.56 annually, Kroger has a 1.9% dividend yield.
Check out the latest Kroger earnings call transcript.
Looking ahead, there's plenty of room for Kroger to continue increasing its dividend. Of the company's $1.16 billion in trailing-12-month free cash flow, Kroger is paying out less than half of a billion dollars annually in dividends. In addition, if Kroger can keep growing its bottom line, earnings growth could help fuel dividend growth in the coming years.
Sure, Kroger may not have the appeal of some fast-growing companies in hot industries, but it's a low-risk play that gives investors a dividend to help buffer market downturns.
