The Kroger Co. (KR): This Grocer Could Continue To Outperform

Shifting focus to Kroger, its management expects to increase identical store sales by 3%, with an estimated EPS of $2.71-$2.79, while analysts estimated an EPS of $2.76, for FY14. That’s a huge identical sales growth target, especially since Kroger operates with nearly 3,700 stores, while Safeway Inc. (NYSE:SWY) and Whole Foods Market, Inc. (NASDAQ:WFM) operate with around 1,600 and 345 stores, respectively. JPMorgan has a Buy rating for Kroger with a price target of $35.

Investors’ delight

Kroger has also been returning value to shareholders and, in 2012, returned over $1.5 billion in the form of dividends and share buybacks. At the current price, its shares yield 1.8%, with a modest payout ratio of 18.66%. During the recent quarter, the company repurchased 2.2 million of its shares for $57 million, while an authorized capital of $466 million still remains. This accounts to a pending repurchase of nearly 14 million shares, which, combined by dividend payouts, should boost its annual EPS by 10%-12% (according to management).

Wrap up

At the current prices, shares of Kroger and Safeway trade at a forward earnings multiple of 10 times each, while Whole Foods Market trades at 25 times forward earnings. According to analyst consensus, the annual EPS of Kroger should grow by 8.2% for the next five years, which seems pretty solid by the standards of defensives.

According to a recent report, organic foods have penetrated only 45% of American households, which suggests that there’s still a significant upside in store for the entire industry. With that in mind, I believe Kroger is a great income growth stock and deserves nothing short of a Buy rating.

The article This Grocer Could Continue To Outperform originally appeared on Fool.com and is written by Piyush Arora.

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