Roundy’s has been a nasty investment since its IPO back in February 2012. Including dividends, the stock is down 10% from its IPO, while the S&P 500 is up 26.3%.
Dividend
The 6.55% dividend can be enticing. Who wouldn’t want that instead of the horrendous bond yields we have currently? But keep in mind that Roundy’s dividend used to be close to 12% less than a year ago. Roundy’s Inc (NYSE:RNDY) is paying out less while its share price drops. That’s not a good recipe for long-term investors.
Debt and cash flow
A look at Roundy’s 10-Q shows some bigger problems. They have $125 million and $675 million in debt that matures in February 2017 and February 2019, respectively. That may seem like a long way off. So, to put those amounts in perspective, let’s consider the following for Roundy’s:
- Market cap of $335.5 million
- Cash at 3/31/13 = $65.3 million
- Cash flow from operations for Q1 2013 = $13.9 million
- Cash flow from operations in 2012 = $105.7 million
If Roundy’s can match its 2012 cash flow from operations for the next 6 years (2013 – 2018), it will produce $634.2 million, not quite enough to cover the $800 million total debt. The $125 million due in 2017 should be fine, but Roundy’s will have to grow its cash flow just to pay-off its remaining debt in time. Then, it still needs to find cash to cover capital expenditures and the dividend. At that point, you’re counting on another refinance just to keep going. This could certainly happen if things go well, but who knows what rates will be then. Roundy’s Inc (NYSE:RNDY) currently gets LIBOR plus 4.5%. Again, this is not a good recipe for investors.
Alternatives
If you want to invest in grocery stores, look at some of Roundy’s Inc (NYSE:RNDY) competitors for a better story.
The Kroger Co. (NYSE:KR) has its own mountain of debt, but is in a much better cash flow position to handle it. The stock has had a great run in 2013. Its P/E of 12.6 is reasonable and it provides a solid 1.7% dividend yield.
Safeway Inc. (NYSE:SWY) has a 9.3 P/E and a 2.8% yield, giving it a better valuation and yield than The Kroger Co. (NYSE:KR). However, Safeway Inc. (NYSE:SWY) has been less consistent than Kroger and isn’t as big as Kroger.
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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