It isn't exactly common for a company to declare a double-digit dividend raise. It's also rare when this comes from a business in a sector not generally known for doing so.
Yet that was the case in late June when Kroger (KR 0.74%) announced its upcoming set of payouts. In doing so, the veteran supermarket operator unveiled a hefty dividend increase of 24%; let's unpack the reasons why -- and whether this makes it a good dividend stock to own now.
The power of good fundamentals
In announcing that dividend raise (to $1.04 annually spread among four quarterly payouts, from the preceding $0.84) Kroger CEO Rodney McMullen said, "Our business continues to generate strong and consistent free cash flow and has proven to be resilient in a variety of operating environments."
That pronouncement tracks with the company's performance. In its most recently reported quarter, comparable-store sales (or "comps") rose an encouraging 4% year over year, excluding gasoline. (For those more interested in total sales, which account for fast rising-gas prices, sales jumped by 8%.)
Good discipline with operating, general, and administrative expenses -- which actually fell by 6% -- led to an even higher rise in non-GAAP (adjusted) net profit, which saw a 22% leap.
That's impressive for such a large and established operator in the ever-competitive supermarket space. The fundamental improvements lie on a solid foundational business strategy that has made Kroger the leading retailer in such grocery categories as flowers and specialty cheese.
A Target on its back?
I suspect there's more than basic fundamentals behind Kroger's generous dividend raise. Throughout most of the coronavirus pandemic, the company did extremely well as a go-to destination for a great many customers essentially trapped at home. In fact, the company's shares hit their all-time peak this past March, rising to over $60 apiece.
One hugely important metric for dividend stock investors is yield, and as prices go up yields retreat. Investors also like to compare dividend stocks from individual sectors; if the yield of one is significantly lower than that of its peers, those folks might shun it in favor of a rival.
Compounding that, we recently witnessed another relatively hefty dividend increase from a famous retailer. In mid-June, Target declared a 20% hike to its payout despite disappointing metrics in its latest quarter. Of course, we can't say whether Kroger's dividend raise was influenced by Target's in a keeping-up-with-the-Joneses move; regardless, Kroger's 24% increase certainly holds its own.
Room for a raise
A more important consideration, of course, is whether Kroger can afford the bump. When looking at a major dividend hike, investors should always do their best to determine whether its within their company's means.
Kroger holders will be relieved to learn that the company is fine on this score. In fact, it's actually a fairly conservative manager of its books. It ended last year with near-record free cash flow (FCF) of almost $4.2 billion and spent just $589 million on dividend payouts. The company is a far more eager buyer of its own stock, but even its busy share-buyback program consumed less than half that FCF figure, at $1.65 billion.
More growth seems to be in the cards for Kroger. The company believes it will continue to grow those all-important "comps" at a slightly lower but still encouraging rate of 2.5% to 3.5% this year. Analysts tracking Kroger stock are, on average, modeling higher growth in total revenue by around 7%, and they're also estimating a 6% improvement in per-share net profit.
So the company has the financials to support its dividend, and what's more, it seems as if the fundamentals are still on the way up. I'd say that makes it a solid dividend stock worthy of consideration by any investor.
Kroger's dividend increase, by the way, will kick in with the quarterly payout scheduled for Sept. 1 to investors of record as of Aug. 15. At the most recent closing stock price, the new amount would yield just under 2.2%.