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Warren Buffett's Berkshire Hathaway Likes Kroger Stock and You Should, Too

By Daniel Sparks - Jun 29, 2021 at 7:41AM

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A recently announced strong, double-digit dividend increase draws attention to the company's momentum.

Following Kroger's (KR -1.08%) better-than-expected fiscal first-quarter results earlier this month, the company is announcing a double-digit increase to its dividend. The significant increase represents a meaningful acceleration  from its dividend hike last year, reflecting the company's impressive business momentum and its improving balance sheet and cash flow.

Here's a closer look at Kroger's dividend -- and why the grocer's stock remains a good bet for investors looking for a steady stream of growing income.

Stacks of coins

Image source: Getty Images.

Dividend growth

Kroger said last Thursday that it was increasing its quarterly dividend payout by 17%. This is up substantially from increases of 12.5% and 14.3% in 2020 and 2019, respectively.

"In recognition of our strong performance during the last year, we are proud to increase the quarterly dividend at a higher rate than our historical average," said Kroger CEO Rodney McMullen in a press release about the dividend hike. "This increase reflects the Board of Directors' confidence in the strength of our free cash flow and our ability to deliver consistently strong and attractive total shareholder returns."

The dividend increase also notably comes after the company's strong fiscal first-quarter results. Revenue and earnings per share for the period were $41.3 billion and non-GAAP (adjusted) $1.19, respectively. These figures were ahead of analysts' average forecast for $39.8 billion and $1.01. 

Signaling the company's recent momentum, the company increased its forecast for full-year adjusted earnings per share to a range of $2.95 to $3.10, up from a previous forecast for $2.75 to $2.95.

A woman looking at her phone while shopping for groceries.

Image source: Getty Images.

Strong fundamentals that Berkshire Hathaway likes

Kroger's dividend increase makes sense in light of the company's robust fundamentals. The company expects to generate $1.8 billion to $2 billion of free cash flow this year. Yet Kroger paid out only over a half of a billion dollars in dividends over the trailing-12-months, leaving plenty of room for dividend growth down the road.

Further, management is quick to point out that 2021 is a tough year with difficult comparisons due to the pandemic. If you average last year's free cash flow with this year's lowered free cash flow, the average annual free cash flow is expected to be between $3 billion and $3.1 billion. The $544 million that Kroger paid out in dividends over the trailing 12 months only represents 18% of this sum, explaining management's confidence to accelerate its dividend increase.

The company's strong fundamentals have notably attracted major attention from two important parties: Kroger itself and Warren Buffett's Berkshire Hathaway (BRK.A -0.87%) (BRK.B -0.78%). Signaling how undervalued Kroger thinks its own stock is, the company's board approved a new $1 billion share repurchase program in June. Perhaps Kroger management is taking a cue from famed investor Warren Buffett. Berkshire Hathaway has been increasing its stake in Kroger, making the position more than 50% larger earlier this year. Berkshire now owns $2 billion of Kroger stock, or 6.7% of the company. 

Given the company's healthy cash flow and recent ability to post results above consensus analyst estimates, investors may want to consider following in the footsteps of Buffett's Berkshire and Kroger's share repurchase program. With a 2.1% dividend yield, this company is likely to reward shareholders with a growing stream of dividend payments for years to come.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Kroger Co. Stock Quote
The Kroger Co.
KR
$48.55 (-1.08%) $0.53
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$457,277.49 (-0.87%) $-4,022.50
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$304.26 (-0.78%) $-2.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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