Being the U.S.’ largest grocer, Kroger is one of the best at returning cash to shareholders via dividends and share buybacks. Kroger recently upped its dividend payment by 30% and has plans to enhance shareholder return by 10% to 13.5% over the long run, with 2% to 2.5% of that coming via dividends.
Kroger is also looking to grow its bottom line. The grocer plans to either build or expand 50 supermarkets in 2013. One nice thing about Kroger is its pharmacies, which help improve its sales profile. This, in part, is expected to help its EBITDA margin remains above 4% for fiscal 2014.
However, one of the big issues that Kroger will face is pricing pressure from the like of Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). Wal-Mart already offers groceries via its super-center locations and Target is implementing its P-fresh model, which includes consumables, and both of the retail giants also have in-store pharmacies.
The other struggling grocer, SuperValue, also sold off some of its key assets. Back in March, the grocer sold off some 877 supermarkets to Cerberus Capital. The sale includes stores from the Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market chains. The move will allow SuperValu to focus on its Save-A-Lot discount chain. But even with the cash injection from the sale of Cerberus, SuperValu, like Safeway Inc. (NYSE:SWY), still has a highly levered balance sheet.
Hedge fund trade
Safeway Inc. (NYSE:SWY)has some 28 hedge funds long the stock, which was a 27% increase from the previous quarter. This includes billionaire Ken Griffin of Citadel Investment Group with the largest position, owning some $75 million in stock (check out Citadel’s cheap stocks).
Meanwhile, Kroger had only 23 hedge funds long the stock. Steve Richman’s East Side Capital had the largest position in the stock, worth some $188 million and accounting for 9.4% of its total 13F portfolio (see East Side’s top stocks).
Holding some of the highest hedge fund interest among grocers was Whole Foods, with 32 hedgies long the stock. Having the largest position was billionaire Jim Simons of Renaissance Technologies, worth some $191 million (check out Simons’ cheap stock picks).
Bottom line
I still like Whole Foods as the best grocer given the company’s robust growth prospects and strong balance sheet. Kroger has a debt-to-equity ratio of 1.4, with Safeway Inc. (NYSE:SWY) at 1.9, while Whole Foods has no debt. Notice I didn’t mention the troubled SuperValu, which has a negative equity due to a $3.3 billion accumulated deficit in retained earnings. Whole Foods is at the forefront of the changing consumer preferences and has an awareness of health consciousness shoppers; thus, it’s the top investment in the grocery space.
It’s hard to believe that a grocery store could book investors more than 30 times their initial investment, but that’s just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market.
The article This Grocer Still Isn’t Safe originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
