These are challenging times. There's conflict here in the U.S., war breaking out in the Mideast, trade wars, and tariffs, as well as rising prices and recession fears. As gold prices soar and investors seek safe havens, how does one stay in the stock market and hedge against uncertainty?
Defensive, recession-resistant stocks are the way to go, and in that category, Kroger (KR 9.05%) stock deserves a closer look.
Kroger is a grocery giant that walks under the radar. Sure, it's not a flashy artificial intelligence stock, but it's one of the nation's largest grocery store chains and offers reliable earnings, rewards its shareholders, and plays an indispensable role in the communities in which it operates.
Kroger reported first-quarter earnings before the opening bell today. So, let's take a look at three reasons why Kroger stock is a buy now.
1. Kroger is a classic, defensive play with broad reach
There are few businesses that are more stable than the ones that provide our food. Even when people tighten their budgets, cancel vacations, or delay big-ticket purchases, they're still going to spend money at the grocery store.
Kroger currently operates more than 2,700 stores across the United States, including brands like Fred Meyer, Ralphs, King Soopers, Harris Teeter, and, of course, Kroger. It also operates more than 2,000 pharmacies in its stores and 1,500 fuel centers. That helps expand Kroger's reach into several revenue streams.
Image source: Kroger.
In addition, Kroger has nearly three dozen food production and manufacturing facilities where it produces private-label, low-cost products. These store brands are usually much cheaper than name-brand items and provide Kroger with greater profit margins -- particularly when customers are looking to stretch their grocery dollars.
2. Kroger has a reliable dividend
Berkshire Hathaway CEO Warren Buffett would likely be the first to tell you that the best stocks to hold represent companies that take care of their shareholders. And Kroger is definitely one of those.
Kroger stock currently offers a dividend yield of around 2% and the company has increased its dividend payout annually for the last 19 years. In addition, Kroger is providing more value to shareholders through a $7.5 billion share repurchase authorization, which includes a $5 billion accelerated buyback that was announced after its bid to acquire Albertsons failed.
Solid dividends and share buyback programs are important for any investor who is looking to build a portfolio with sustainable wealth. And perhaps that's why Berkshire Hathaway's portfolio contains 50 million shares of Kroger stock, valued at about $3.5 billion.
3. Kroger stock is cheap
One thing that you want to avoid when choosing defensive stocks is picking one that will negatively surprise the market when it gives a quarterly report. That's another reason to like Kroger: It consistently delivers in its quarterly reports, matching or beating analysts' expectations for earnings in each of the last four quarters.
That trend continued this week when Kroger issued its first-quarter numbers. Adjusted earnings per share of $1.49 were $0.04 better than expectations, and the company's gross margin increased from 22% a year ago to 23% now. The company just missed the revenue estimate, posting $45.12 billion versus analysts' consensus expectations of $45.16 billion. Investors were pleased, and the stock is up 7% at 10:15 a.m.
Kroger also announced it was taking a $100 million impairment charge related to the planned closings of 60 locations in the next 18 months. It increased its full-year identical sales guidance (excluding fuel sales) from an increase of 2% to 3% to an increase of 2.25% to 3.25%. This metric looks at sales in locations open five or more quarters.
While the company didn't break down its sales by segment, it said its e-commerce sales were up 15% on a year-over-year basis.
"We continue to believe that our strategy focusing on fresh, Our Brands and eCommerce will continue to resonate with customers and our resilient model positions us well to navigate the current environment," Chief Financial Officer David Kennerley was quoted as saying in the company press release.
Another thing that stands out is Kroger's valuation. Its forward price-to-earnings ratio of about 15 is attractive, as well as its price-to-sales ratio of around 0.3. It's much cheaper than competitors Walmart, Amazon, and Costco Wholesale.
KR PE Ratio (Forward) data by YCharts
So, Kroger is providing great value and security in a challenging economic environment, and is doing so while being a dominant player in the grocery market.
The bottom line on Kroger stock
Kroger is a great long-term play that investors should consider right now. As uncertainty rises, it makes sense to gravitate toward stocks that are steady, essential, and take care of their shareholders.
While it was a disappointment that the Albertsons deal failed to materialize, I'm comfortable with the moves that Kroger is making now -- shedding unprofitable stores, focusing on e-commerce and its in-house brands. That's the kind of steady performance that I'm looking for when I consider defensive stocks.
