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Kroger: A Solid Stock For A Recession (NYSE:KR)

Kroger Supermarket Signage

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On May 20, 2022, the stock market dropped for a seventh straight week. This is the longest such streak in two decades. Not since the dotcom bubble ended have stocks dropped as many weeks in a row. Additionally, the S&P 500 (SPY) briefly dropped into bear market territory, although it closed above that level.

There is plenty to concern investors. Gas prices continue to increase. Inflation, initially expected to be a brief problem, is much more entrenched than initially anticipated. Shortages of baby formula have many concerned. No one knows the outcome of the Russia-Ukraine War or how bad it will affect the wheat market. This will likely increase inflation for products that use wheat. The overall stock market could head down from here, and a recession is looking increasingly likely. That’s why it’s important to own companies that will continue making money despite all of these problems. Kroger (NYSE:KR) is one such company that should perform relatively well in a down market.

Stocks For All Markets

In a deep recession or depression, many companies will fare poorly. Some will go out of business. The companies that are likely to experience the biggest problems are those that rely on discretionary spending.

Companies that have lengthy government contracts to provide millions or billions in goods or services will likely do just fine unless state or local governments cancel their contracts. On the other hand, businesses that provide a subscription-based model may run into trouble as households look for ways to trim their expenses, even if it’s just a few dollars a month. High-end cable packages have been less common as people cut the cord, but even more people might decide to end their relationship with a cable company or streaming service in a prolonged recession.

One type of business that should be quite resilient during a down market is the grocery business. People can live without Disney+ (DIS), but they cannot live without food. While Walmart (WMT) sells more groceries than any other retailer in the US, Kroger is the largest chain that is primarily a grocery chain because WMT is also a general merchandiser that sells clothes, appliances, and various and sundry other items. Kroger operates under different names in different areas of the country. In addition to Kroger stores, the company owns brands like Fred Meyer, Dillons and King Soopers.

Kroger’s Recent Record

KR dropped by about 10% over the past week after a couple of major competitors indicated that higher costs were starting to erode their profits. The price has dropped right at 20% in recent weeks after the selloff in equities started. In 2021, the grocery chain was able to list a $3.5 billion operating profit on a GAAP basis, which translated to an EPS number of $2.17. Kroger looks to provide between 8% and 11% for investor returns on an annualized basis, which includes 5-6% in dividends and share repurchases.

According to the 2021 annual report, sales for Kroger increased by about $5.4 billion over what they were in 2020. Revenue is up 7.52% over the past year. GAAP profitability dropped from $3.27 to $2.17 over the past year. Despite the drop in net income, the dividend over the past 12 months has been well covered at $0.84 per share. The company is likely to increase the dividend in the next quarter, as the annual increase usually goes into effect with the September payment. Since reinstituting the dividend in 2006, the company has increased its payout every year. The most recent dividend increase was 16.67%, which indicates the company believes it should have solid prospects in the near term. It’s frequently argued that the safest dividend is the one that’s just been raised. The dividend increase announcement will give a good idea of how Kroger views its near-term prospects.

The current dividend yield is 1.73%, which is slightly higher than the yield offered by the S&P 500. The payout ratio is currently 39%, so KR should be able to continue making the dividend payment while providing a decent increase. Shareholders also received a bump because the company purchased more than $1.6 billion in shares back in the past year. Over the same period, the company repurchased around 27 million shares. Over the past two years, that total increases to 51 shares repurchased, which equals about 6.3% of the total shares outstanding. This decreases the number of shares outstanding, but it also lowers the amount of the dividend because it will be paid on fewer shares.

As noted above, Kroger’s share price dropped because of negative news from its competitors. The company’s next earnings call is scheduled for June, and this should give a good idea of how the current environment with higher producer prices has affected KR in recent months. This could lead shares to go even lower, although some of this expectation is probably already cooked into the current share price. A lower price always provides a better entry point, and at a current P/E ratio of 22.39, it’s hard to say that Kroger is overly cheap at the moment. However, the company will likely be standing decades into the future, and it is a top-notch grocery chain that provides much of the food that Americans need to eat on a daily basis.

Conclusion

Kroger is an iconic American brand. It offers its own house brand on many products that allow consumers to save money on quality items. It is the largest pure grocery chain in the US, and it has a solid dividend history, growing dividends for the past 16 years. The payout ratio is low, so there should be room to increased it in the future. The best part of this stock is the fact that it sits in a sector of the economy that should perform relatively well in a recession. People have to eat, and many of those people will shop at Kroger. Like the broader market, this stock could drop more in the coming months, but it should remain standing and paying growing dividends into the foreseeable future.


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