Following Kroger's (KR -0.04%) 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.
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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.
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 0.36%) (BRK.B 0.21%). 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.
