Don’t Touch Roundy’s Inc (RNDY), Please!

Both of these companies are in much better shape than Roundy’s Inc (NYSE:RNDY). Both have come back recently after taking a big hit from stores like Whole Foods, which offers healthier alternatives to customers willing to pay a higher price for them.  Kroger and Safeway have started to jump on the health and organic trend and have been successful in their own efforts.

The Kroger Co. (NYSE:KR) is a larger, more stable company than Safeway.  Kroger has an $18 billion market cap versus Safeway Inc. (NYSE:SWY)’s $5.6 billion market cap.  Kroger has produced at least $2.6 billion in operating cash flow over the past three years, and has spent the majority of that on capital expenditures to better its business over the long-term.  However, while Safeway has produced at least $1.5 billion in operating cash flow over the past three years, it has used that cash mostly to buy-back shares of its own stock.  Those buy-backs can be nice in the short-term for investors since the earnings-per-share will increase with the decreased share count.  However, I’d prefer to go with Kroger since it has focused its cash use on a much longer-term need of making sure its infrastructure is in good shape.

The bottom line

While I’m not a huge fan of grocery store stocks because of their low margins and high debt and inventory levels, Kroger and Safeway do seem to be on their way back up.  They have stabilized after a rough stretch and can now provide investors with some stability to go along with their dividends.  If you’re willing to take on more risk, choose Safeway.  Otherwise, stick with Kroger and enjoy the 1.7% dividend to add to your gains in the stock price.

Roundy’s?  No way.  Management must show me something amazing to justify investing in the company while it pays a high dividend and tries to handle this debt load at the same time.

The article Don’t Touch Roundy’s, Please! originally appeared on Fool.com and is written by Dave Zaegel.

Dave Zaegel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Dave is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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