The Kroger Company (NYSE:KR) likes to do it all. "Our long-term financial strategy continues to be maintain our current investment grade debt rating, repurchase shares, have an increasing dividend and fund increasing capital investments," stated CFO Mike Schlotman during the company's most recent conference call. Can Kroger be all things of value to shareholders yet still afford to fork over hefty share buybacks?
During the past year through the end the company's fiscal second quarter ending Aug. 16, Kroger bought back $1.57 billion of shares of stock. The first fiscal quarter alone included $1.1 billion of it before exhausting what was left of the authorization which was $78 million in the second quarter.
Not a problem for Kroger -- it simply authorized a new $500 million program which it is free to execute depending on market conditions.
There is something to be said for timing. "Market conditions" could probably be translated into buy on weakness, hold off on strength. You may find it interesting that 70% of the buybacks over the past year were executed during a single quarter -- a quarter where Kroger had the weakest point in its stock price and near its 52-week lows.
With the benefit of hindsight, it was a smart move. Kroger shareholders got the most bang for their buyback buck.
Biting off more than it can chew?
At first glance, Kroger's balance sheet leaves a lot to be desired. Total liabilities are a whopping $24 billion while it maintains a cash balance barely over $0.2 billion. However, a quick look at the 10Q filing with the SEC should alleviate some worry. For starters, Kroger has nearly $1.7 billion of its credit line untapped with the ability to increase it by $0.75 billion for a total of $2.5 billion available.
Over the next 12 months, only $1.4 billion in debt becomes due which is far less than its available liquidity from both cash and untapped credit. In addition, due to its high credit rating it expects to have the ability to refinance the debt and do so on favorable terms. Who can blame creditors?
As the largest company of grocery stores that sell mostly food that we all need no matter what happens to the economy it would seem Kroger is somewhat insulated from serious macroeconomic risk. This is evidenced by its 43 quarters in a row of identical supermarket sales growth despite the terrible economic crash of 2008.
Risk and reward
Since Kroger has so much access to capital, cash flow, and apparently recession-resistant business model, the downside risk seems quite low of betting on itself. If the company runs into a soft quarter or two, possibly even a year or two, it has plenty of reserves to stay on its feet.
If history is any guide, then investing in its own stock will prove to be a wise bet. One of the prospects for growth lies with the corporate-owned Simple Truth and Simple Truth Organic food lines which saw double-digit unit and sales growth year-over-year last quarter.
The Simple Truth brand alone was guided to pull in $1 billion this year. COO Mike Ellis stated in the last conference call, "It appears to us that the natural organic customer is changing and growing in numbers." There could be a high sort of wild card reward possibility from these corporate product lines.
Foolish bottom line
Kroger can afford the buybacks. The company has a history of using money wisely in terms of maintaining access to liquidity, keeping its debt rating high, and pouring in cash flows no matter what the economy is doing while also finding new products and ways to keep customers coming in. Add to that Kroger executes the actual buyback purchases mostly just during opportune times and shareholders should feel comfortable with the power of the buyback in Kroger's hands.
When the bulk of the buybacks occurred back with a market cap of $20 billion in the first quarter, it caused a 5% effective increase in EPS permanently starting with that quarter alone, all things being equal. In short, the past buybacks executed and the new authorization for more make sense.