As one of the United States' largest retailers generating billions in sales annually, Kroger (KR -0.36%) has made large strides from its IPO in January 1977. A $10,000 investment at the opening IPO share price of $0.75 would have bought 13,333 shares. That investment would now be worth millions today. Let's see how that happened.
An impressive growth story
Kroger stock has grown at such a rate that the company implemented five 2-for-1 stock splits between 1979 and 2015 to keep the individual share price manageable. With each split, the shareholder received two shares for each share owned, doubling the total shares on hand while cutting the stock price in half. Most companies initiate stock splits to keep shares priced to be attractive to a wider range of buyers. The company's market capitalization, or the number of shares the company has issued multiplied by the current market price of the stock, remains stable before and after a split.
After accounting for the five stock splits, a shareholder starting with 13,333 shares in 1977 would have 426,656 shares in 2019. At the time of this writing, the share price was $27.84, which would value the investment at $11.729 million -- not accounting for dividend reinvestments.
In 1988, the Haft family attempted a hostile takeover of Kroger. To prevent the takeover and make the company unattractive to other corporate raiders, Kroger went deep into debt and paid out a one-time dividend that totaled $3.2 billion. This put the company deeply in debt, making it far less attractive as a takeover target for the Haft family or any other potential corporate raider. The dividend was paid at $40.82 per share. An IPO investor purchasing 13,333 shares in 1977 would have been holding 53,332 shares (because of two stock splits by that point) when the dividend was paid, earning the shareholder an extra $2.18 million.
In total, a shareholder purchasing $10,000 of Kroger in 1977 would have received $3.52 million in dividends from 1977 to 2018. After the special dividend of $40.82 per share in 1988, Kroger halted all dividend payments until 2014 as the debt undertaken to ward off corporate raiders damaged the balance sheet enough to prevent dividend payments for 25 years. Including dividends, splits, and the share price increase, an investor holding 13,333 shares in 1977 and ending with 426,656 shares currently would net a total shareholder position of $11.729 million and a dividend return of $3.52 million -- totaling $15.25 million.
Where Kroger is now
Barney Kroger started The Great Western Tea Company in 1883 with his savings of $372, and slowly built 40 stores by 1902, naming them the Kroger Grocery and Baking Company. By 1929 Kroger had over 5,000 stores in operation, and by 1979 the Kroger brand became the second-largest supermarket chain within the United States.
Kroger now operates over 3,000 locations with a recently reported third-quarter total revenue of $28 billion derived from 17 Kroger brands throughout 42 states. Fighting for market share with Target (TGT -0.62%), Costco (COST 1.05%), and Walmart (WMT 0.93%), Kroger is in fourth place among national grocers as ranked by market capitalization, and third place when ranked by revenue, with a trailing 12-month revenue of $120.99 billion over Target's $77.69 billion.
Income investors will be pleased with a 2.27% forward dividend yield, a 29.17% payout ratio, and a five-year dividend compound annual growth rate (CAGR) of 11.5% -- well over Walmart's forward dividend yield of 1.77%, Target's 2.07%, and Costco's 0.87%.
Where Kroger is heading
In 2017, Kroger announced a strategy designed to improve the customer shopping experience by investing in technology, reducing expenses, establishing external company partnerships, and improving merchandise optimization. Kroger reaffirmed the strategy in 2018 by claiming $6.5 billion in free cash flow by 2020 will come from Restock efforts in addition to generating an operating profit of $400 million.
Kroger's CEO Rodney McMullen announced in the recent third quarter that "identical sales were the strongest since we started Restock Kroger and gross margin rate, excluding fuel and pharmacy, improved slightly in the quarter." Restock Kroger is proving to be an effective strategy to align long-term objectives.
Given management's guidance for fiscal 2019 and 2020, in addition to investments in technology and customer convenience, Kroger can be expected to deliver incremental value annually -- making Kroger a good company for income investors reaching for a sustainable and consistent dividend. Given these factors, a shareholder with 426,000 shares in Kroger might want to consider diversifying the profits they have gained to-date across several retailers such as Costco and Walmart -- as both are competing with Kroger and hold the advantage of significant retail market share -- lowering the risk to an impressive $11.73 million position.