Can One Successful Segment Save Roundy’s Inc (RNDY)? – The Kroger Co. (KR), SUPERVALU INC. (SVU)

Investors interested in grocery retail, but want more stability would likely favor The Kroger Co. (NYSE:KR). Kroger is much more well-established, as one of the nation’s largest grocery chains that holds a $15 billion market capitalization. The stock pays a solid 2% dividend that the company raised 30% last year. The company reported sales and diluted earnings per share increased more than 5% and 25%, respectively, through the first three quarters of the fiscal year. Clearly, The Kroger Co. (NYSE:KR) operates a much more mature and established business than Roundy’s, with a better balance sheet and more reliable financial performance.

The good news for Roundy’s

Fortunately for Roundy’s, the good news is that the stock is cheap. In the earnings announcement, the company gave fiscal 2013 guidance of 3% to 4% sales growth and diluted earnings per share in a range of $.88 to $1.01. That means that at current prices, investors are paying slightly more than 6 times the midpoint of Roundy’s forward diluted earnings per share forecast. The Kroger Co. (NYSE:KR), meanwhile, trades for more than 20 times trailing earnings.

In addition, Roundy’s pays a hefty dividend to shareholders. The company did cut its dividend in half last year to free up cash to open new stores and pay down debt. To the company’s credit, long-term debt was reduced by more than $123 million during 2012.  Even after the dividend reduction, the stock yields a hefty 8%, still a commanding dividend yield in today’s low-interest rate environment and significantly higher than The Kroger Co. (NYSE:KR)’s paltry 2% yield by comparison. Assuming a bottom is in for the dividend, new investors will earn sizable returns while they wait for the company to solve its fundamental issues.

Bottom line

Roundy’s is doing the right thing by focusing on expanding the Mariano’s chain, which is much more successful than its other stores.  In addition, the company paid down debt in 2012 and reduced its dividend to a level that is both competitive and provides the company additional flexibility going forward. It remains to be seen whether one hugely popular franchise can save the company, but for investors who aren’t afraid to stomach volatility, you’ll be paid a huge dividend to wait for the turnaround at Roundy’s.

The article Can One Successful Segment Save This Stock? originally appeared on Fool.com and is written by Robert Ciura.

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