Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn’t sustainable. In others, the dividend is so low, it’s not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
This week, I went shopping for great a growing dividend and found it in Safeway Inc. (NYSE:SWY)‘s aisles.
No cleanup needed
Grocery stores are far from being an exciting business model — but sometimes the more boring and necessary a business, the more consistent the cash flow and dividend growth will be! Thus is the case with Safeway, which reported stunningly positive fourth-quarter results yesterday that sent the stock through the roof.
For the quarter, Safeway noted a 13% increase in net income as same-store sales (excluding fuel) rose 0.8% and its razor-thin operating margin jumped 39 basis points. The way I see it, there are four major reasons that Safeway is now excelling.
Safeway’s outperformance explained
First, Safeway’s loyalty rewards programs and fuel stations are emphasizing the fact that it understands its customer better and that it’s finally “getting with the times.” Safeway’s management noted that usage of mobile apps as well as digital couponing has been up considerably more than anticipated. At the moment, about 45% of its sales are derived from customers who are part of its loyalty rewards program, called “Just for U,” with the company targeting a level of 65%. By conceding to small coupons up front, Safeway is able to keep consumers in its stores longer, causing them, oddly enough, to purchase more.
Also, like The Kroger Co. (NYSE:KR), Safeway made it a point to install fueling stations next to its stores as way of rewarding loyal customers and making the shopping experience more convenient. Both Kroger and Safeway have seen demonstrable positives since installing fuel stations within the past few years.
Second, Safeway’s gift-card subsidiary, Blackhawk Network Holdings, has been an absolute monster in the prepaid market. With NetSpend Holdings Inc (NASDAQ:NTSP) having been purchased earlier this week for a hefty premium, it’s very likely that the value of Blackhawk, which has as good a retail presence, if not the best, among gift cards, is going to head higher. Safeway is planning to spin off Blackhawk sometime in the first half of this year.
Third, food costs and foul-ups are finally working in its favor. Historically high food costs brought about by a record drought in 2012 have given way to more moderate food costs while missteps by some of Safeway’s peers have allowed it to attract new customers. SUPERVALU INC. (NYSE:SVU), for instance, recently agreed to sell multiple chains to a consortium led by Cerberus Group for $3.3 billion. The deal, which was spurred by SUPERVALU’s unsustainably high debt levels, could necessitate the closure of underperforming stores and give Safeway a chance to pick up share in those markets.
Even Wal-Mart Stores, Inc. (NYSE:WMT), which historically undercuts everyone else on price in order to draw consumers, is struggling. Wal-Mart, which generates more than half of its revenue from grocery sales, cautioned just yesterday that delayed tax refunds and higher payroll taxes are eating into its customer base and offered investors a tepid forecast. Safeway hasn’t had nearly these same issues, with its loyalty rewards drawing more traffic into its stores.
