Over the past five years, shares of Kroger (KR 1.80%) have climbed a superb 100%, handily beating the 52% gain of the S&P 500. Perhaps more relevant for investors looking at safer places to park their capital in an uncertain economic time, the stock is up 11% on the year (as of May 23). After all, people still have to continue buying groceries even when inflation is high and budgets are stretched.
Is Kroger a stock that investors should have in their portfolios right now? Or is it time to sell? Let's try to find the answer by looking closer at this grocery retail stock.
Diving into the latest fiscal quarter
During its fiscal 2022 fourth quarter (ended Jan. 28), Kroger's revenue increased 5% to $34.8 billion, exceeding Wall Street analyst forecasts. A standout data point was the growth of digital sales, up 12% compared to the year-ago period. Kroger is also working on boosting its delivery capabilities with a new distribution center in the Denver area, further expanding its reach.
Everyone from company executives to investors to customers probably has inflation in mind. While the Consumer Price Index, the key measure of inflation in the U.S., is cooling down, it's still above normal levels. One thing the leadership team has noticed is that spending on food for the home is becoming more prominent than spending on food away from the home.
"Our customers were looking for more ways to stretch their budget," CEO Rodney McMullen said on the Q4 2022 earnings call. These words make sense given that Kroger estimates cooking at home is nearly four times less expensive than going out to eat. The company said it added 1.1 million higher-income households as customers in the quarter, as even more affluent people are searching for value.
Looking ahead, management forecasts fiscal 2023 same-store sales -- what the business calls identical sales -- to increase by 3% (at the midpoint), after adjusting for the end of its agreement with Express Scripts, a pharmacy company. Adjusted diluted earnings per share are expected to rise by 5% to 9% year over year, which would be a healthy gain.
"While there is still uncertainty regarding the economic outlook, our go-to-market strategy is resonating with customers, and we believe our successful value creation model positions us well to navigate evolving market conditions," CFO Gary Millerchip mentioned on the call, demonstrating his unwavering optimism about the business.
Looking at the valuation
Despite Kroger stock's impressive outperformance over the past five years, it only trades at a price-to-earnings (P/E) ratio of 16 right now. That's a slight premium to the stock's trailing 10-year average valuation, but it's cheaper than the S&P 500's P/E of close to 19. Kroger shares also sell at a huge discount to industry rivals like Walmart, Costco, and Target. Some investors are certainly hoping this value gap shrinks, providing added upside to the stock.
Kroger is a solid dividend payer, with a current yield of 2.1%. What's impressive is that the quarterly dividend, now at $0.26 per share, has increased at a compound annual growth rate of 14% since 2006. In fiscal 2022, only 32% of earnings were paid out in the form of dividends, leaving plenty of room to continue hiking the payout ratio in the years ahead.
It's hard to deny the positive factors working in Kroger's benefit, namely its strong momentum during what continues to be an extremely uncertain economic time, and its ability to pay meaningful dividends. Investors seeking safety for their portfolios, who aren't that interested in the companies they own having sizable growth opportunities, might want to seriously consider buying shares of Kroger.
