SUPERVALU's Fall From High-Dividend Grace

Once a company becomes a member of the elite Dividend Aristocrats list, it takes a lot to dislodge that company from its ranks. After all, having demonstrated a 25-year history of raising dividends even through the ups and downs of the economy, companies don't want to give up the hard-earned distinction without a fight. Unfortunately, though, sometimes losing Dividend Aristocrat status is unavoidable, and SUPERVALU (SVU +0.00%) marks a good example of what can happen to derail a company's dividend success.

SUPERVALU is the company behind the Cub Foods, Farm Fresh, and Shop 'n Save grocery store chains, as well as its Save-A-Lot discount grocery chain. For years, SUPERVALU was able to raise its dividends consistently even as it faced the pressures of low margins and rising competition that plague the entire grocery industry. Let's take a closer look at SUPERVALU to see what happened to force it to cut its dividends and abandon its status as a Dividend Aristocrat.

Dividend Stats on SUPERVALU

Source: Yahoo! Finance. Last dividend and increase refer to ex-dividend date.

What happened to SUPERVALU?
For dividend investors, the end of the line for SUPERVALU came just a year ago, when the company said it would suspend its dividend as part of a broader effort to conserve cash and implement major turnaround initiatives such as price cuts, operational cost-cutting, and potential debt restructuring. In the end, the company sold off some of its best known grocery chains, including Albertson's, Jewel-Osco, and Shaw's, to private-equity company Cerberus Capital earlier this year, retaining its core operations as a much smaller company moving forward.

But the seeds of SUPERVALU's dividend woes had been sown much earlier. Traditional grocery store chains found themselves under huge amounts of pressure during the 2008 recession, as they were stuck in the middle of two competing trends. On one hand, Whole Foods Market (WFM +0.00%) had used its dominance in the organic and health-food segment to produce a much higher-margin business than SUPERVALU and other traditional grocery chains could earn. At the other end of the spectrum, though, increased competition from grocery offerings from Wal-Mart (WMT +0.99%) and other discount retailers prevented SUPERVALU and its peers from competing against Whole Foods purely on price.

Moreover, even SUPERVALU's direct competitors did a better job of differentiating themselves during the recession. Before the company's announcement in late 2009 that it would cut its dividend in half, SUPERVALU had posted six straight quarters of declining same-store sales. By contrast, Kroger (KR +0.92%) relied less on lowering prices and more on initiatives to boost the quality of its own offerings, building a vertically integrated store-brand production chain and doing a better job of bringing in organics and other healthy offerings of its own.

SUPERVALU Dividend data by YCharts.

Combine all those headwinds, and SUPERVALU had few choices but to cut back on its dividend. Moreover, even at its reduced rate, SUPERVALU's dividend proved unsustainable, and now, the company's much-smaller size will likely put demands on its capital for a long time to come.

Will SUPERVALU ever pay dividends again?
At this point, it's unclear when the company might once again be able to make a dividend payout. But even if SUPERVALU rejoins the ranks of dividend stocks, it will still stand as an example of how even the best dividend stocks can fall from grace. It's important to keep your eyes on all your stocks, even the ones that seem most resilient, in order to avoid unpleasant surprises.

Click here to add SUPERVALU to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.