The Kroger Co. (KR): A 32% Potential Upside for This Grocery Retailer

Wal-Mart Stores, Inc. (NYSE:WMT) is the most expensively valued among the three companies. It is currently trading at $74.20 per share, with the total market cap of more than $243.1 billion. The market values Wal-Mart at more than 7.9 times its trailing EBITDA. Wal-Mart also did not have an impressive first quarter earnings results. While its revenue moved up by only 1% to $114.19 billion, its net income increased by 1.1% to $3.78 billion, or $1.15 per share. In the first quarter, Wal-Mart returned around $3.8 billion to shareholders, including $2.2 billion in share repurchases and $1.6 billion in dividends. In the second quarter, company CFO Charles Holley commented that Wal-Mart expected to produce around $1.22 to $1.27 earnings per share in the second quarter of fiscal 2013.

Wal-Mart seems to deserve a higher valuation due to its higher ROIC (return on invested capital) at 12.34%. Kroger ranked second with nearly 9.5% ROIC, while the ROIC of Target was the lowest, at only 6.28%. Income investors might also like Wal-Mart the best with the highest dividend yield at 2.6%. Target offers investors a bit lower dividend yield at 2.5%, whereas the dividend yield of Kroger is much lower, at only 1.8%. Interestingly, the low dividend yield of Kroger was due to the more conservative dividend policy with lower payout ratio. While the payout ratios of Wal-Mart and Target are 33% and 32%, respectively, Kroger only pays 18% of its earnings in dividends. If Kroger increased its payout ratio to 32%, its dividend yield could reach 3.2%.

Kroger could be worth $45 per share

The Kroger Co. (NYSE:KR) seems to be a good stock for long-term investors at its current price, due to the lowest valuation, recent impressive quarterly earnings results and a decent profitability. Moreover, Kroger could easily increase its payout ratio equivalent to the payout ratio of Target or Wal-Mart, pushing up the dividend yield. If an EBITDA multiple of 7.5 is applied to Kroger, it should be worth more than $45 per share.

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

The article A 32% Potential Upside for This Grocery Retailer originally appeared on Fool.com and is written by Anh HOANG.

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