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Better Buy: CVS Health Corporation vs. The Kroger Co.

By Brian Feroldi - May 26, 2016 at 4:20PM

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It's a match-up between a pharmacy giant and a supermarket king. Which of these two stock is the better bet today?

Finding long-term success in the retail industry is tough, especially in today's world where e-commerce companies are rapidly gobbling up market share.

However, there are still a handful of retailers out there that are thriving, including CVS Health (CVS 1.38%) and Kroger (KR 1.71%). Both companies continue to put up solid numbers in this ever-changing retail environment, each currently bringing in more than $100 billion in annual sales. Perhaps unsurprisingly, both companies have been wonderful investments for long-term shareholders, having thumped the market's return for decades.

CVS Chart

CVS data by YCharts

But which of these two retail giants is the better choice for investors looking to put new money to work today? Let's compare a few key metrics from these companies side by side to see if we can ascertain an answer.

Growth

CVS Health has been growing like a weed recently, thanks in no small part to a series of transformative acquisitions that were completed last year. CVS Health recently spent $12.9 billion to acquire Omnicare, a leading provider of pharmacy services to the long-term care industry market. On top of that, management shelled out $1.9 billion to acquire Target's pharmacy and clinic business, which grew CVS' retail footprint by more than 20%.

These two deals are expected to juice the company's top-line in 2016. Management is forecasting that its revenue will grow by at least 17.5% for the full year, though margin pressure will hold back adjusted earnings-per-share growth to about 11%.

Analysts expect that the company will be able to restore its margins over time, as they are forecasting bottom line growth of more than 14% annually over the next five years. 

Image source: CVS Health

Kroger is holding its own on the growth front too, as it's on one heck of a run right now. The company has increased its sales store sales for 49 quarters in a row, a remarkable achievement that spans the great recession. Recently, the company posted comps of 3.9% (excluding fuel), a solid number for a mature grocery store concept.

Kroger's management team has also been using its financial might to perform bolt-on acquisitions. Last year it purchased Roundy's, one of its former rivals with a strong position in the Midwest. The deal added 151 grocery stores to its vast empire under brand names like Pick n Save, Copps, and Mariano's. Management believe that the deal will nicely compliment its other brand concepts like Fry's, Harris Teeter, and Ralphs.

Looking ahead, management expects to increase its earnings per share by 8 to 11% annually, and Wall Street thinks the company stands a good chance of doing so. Analysts are projecting annualized earnings growth of more than 9% over the next five years.

That's a solid rate for an established giant like Krogers, but it's a bit behind that of CVS Health.

Winner: CVS Health

Valuation

Since both of these companies are large and profitable, I think we can rely on simple valuation tools like the trailing and forward P/E ratio to help us determine valuation.

Here's a look at how each of these companies have been valued over the past year.

CVS PE Ratio (TTM) Chart

CVS PE Ratio (TTM) data by YCharts

With a trailing PE multiple of 17, Kroger is trading at a big discount to the 21 that CVS Health is currently fetching. It's also worth pointing out that both of these stocks are trading at a multiple that is far below the 24 that the S&P 500 is currently fetching. 

However, the disparity between the two shrinks dramatically when you look at the forward P/E ratio. Both companies are trading within spitting distance of 16 times next years earnings. 

Still, cheaper is cheaper, so these simple metrics suggest that Kroger's stock is the bigger bargain right now.

Winner: Kroger

Dividends

Both CVS Health and Kroger have a strong history of returning capital to shareholders. Each company has been paying out a dividend for more than a decade.

CVS Dividend Yield (TTM) Chart

CVS Dividend Yield (TTM) data by YCharts

With a dividend yield of 1.60% CVS Health has an edge over the 1.18% yield that Kroger's stock is offering right now.

Still, dividend investors should also concern themselves with dividend growth, too. Over the past five years, Krogers has increased its payout by a strong 15%. That's a great number, but it's less than half of the 31% growth that CVS Health has shown over the same time period.

With a higher yield and a higher dividend growth rate, CVS Health should be the stock that income-focused investors favor.

Winner: CVS Health

Which is the better buy?

Kroger has been a terrific investment for decades and it's also the better value right now,  but if forced to choose I'd have to give the edge to CVS Health. With so many initiatives in place to drive profitable growth and the wind at its back from the gradual graying of the American population, I think it's worth paying the extra premium to own shares. 

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Stocks Mentioned

CVS Health Corporation Stock Quote
CVS Health Corporation
CVS
$93.94 (1.38%) $1.28
The Kroger Co. Stock Quote
The Kroger Co.
KR
$48.14 (1.71%) $0.81

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