Kroger to Boost Shareholders' Value - Analyst Blog

The Kroger Company (KR) plans to utilize its free cash flow to enhance shareholders’ value via share repurchases and dividend payments while maintaining its debt rating.

To this effect, Kroger notified that its Board of Directors recently authorized the repurchase of 500 million shares, to replace the 225 million remaining under the existing $1 billion share buyback program announced in January 2008.

In a separate story, Kroger also informed that it will pay a regular quarterly dividend of 9.5 cents on September 1, 2010 to shareholders of record as of August 16, 2010.

Kroger has been actively managing its capital. Since January 2000, the company has returned $6 billion to shareholders through stock buybacks. It has paid back $929 million in dividends since the inception of its dividend program in 2006.

The company also lowered its total debt by $1.5 billion from January 2000 through the end of the first-quarter 2010. Kroger ended the quarter with long-term debt of $7,525.5 million, reflecting a debt-to-capitalization ratio of 60%. The company had a cash balance of $1,276 million at the end of the quarter, and generated cash flow of $1,552.9 million from operating activities.

During the quarter, the company bought back 3.6 million shares, aggregating $79.5 million, and paid $61.4 million to shareholders by way of dividend.

With signs of recovery in the economy, share repurchases and dividend increases have now become common trends among companies sitting on surplus cash. These strategies not only enhance shareholders’ return, but also boost earnings per share and raise the market value of the remaining shares.

Overall, we believe that the company’s dominant position enables it to sustain top line growth, expand store base and boost market share. Kroger’s customer-centric business model provides a strong value proposition to consumers. It is well positioned to continue its growth momentum primarily through identical supermarket sales growth.

However, the intensifying price war among grocery stores to lure price-focused consumers has compelled Kroger to cut prices, hurting its sales and margins. Consumers are trading down to cheaper substitute brands and shopping for groceries at low-price leaders such as Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST).

Kroger, one of the largest grocery retailers in the U.S, currently operates 2,470 supermarkets and multi-department stores in 31 states under approximately 24 local banners. It maintains a Zacks #3 Rank (‘hold’). It is in line with our long-term Neutral recommendation for the stock.