Kroger Enhances Dividend Payout

In a move to enhance shareholders’ return, The Kroger Company (KR - Analyst Report) – one of the largest grocery retailers – recently increased its quarterly dividend by about 30% bringing the annualized payout to 60 cents per share from the earlier level of 46 cents.

The quarterly dividend, after the hike, will come to 15 cents per share, up from the prior payment of 11.5 cents per share. The increased quarterly dividend will be payable on December 1, 2012, to shareholders of record as on November 15, 2012.

This is the sixth consecutive annual increase in Kroger’s quarterly dividend since it reinstated dividend payment in the year 2006 at the rate of 6.5 cents per share. Its prior dividend increase was made on September 15, 2011, when the company had increased its quarterly dividend by 9.5% to 11.5 cents per share compared with its previous payout of 10 cents per share.

In May, 2012, its close peer – Costco Wholesale Corporation (COST - Analyst Report) – also increased the quarterly dividend by 14.6% to 27.5 cents per share from the earlier level of 24 cents.

Kroger’s dividend increase reflects its focus on cash deployment. Besides paying a competitive dividend, the company’s deployment strategy includes stock buybacks. In the second quarter of 2012, the company repurchased 23.7 million shares of its common stock for approximately $525 million.

Management believes that Kroger has the capability of generating healthy free cash flow and operating results. Moreover, the company’s move to increase dividend signifies its focus on ‘Customer 1^st Strategy’ proving better returns to the stakeholders.

Overall, Kroger is actively managing its capital resources through returning much of its free cash to shareholders via share buybacks and dividends. Moreover, management continues to deploy capital to concentrate more on remodels, merchandising.

On September 7 2012, the company reported better-than-expected second-quarter 2012 results. Quarterly earnings of 51 cents per share increased 24.4% compared with 41 cents per share in the second-quarter of 2011. Kroger results also exceeded the Zacks Consensus Estimate by a couple of cents. Total revenue (including fuel center sales) also climbed 3.9% to $21,726.4 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $21,983 million.

However, we believe that these positives will be offset by recent economic downturn and heavy job losses, which have transformed the way consumers used to shop. Cash-strapped consumers are now prioritizing their purchases, trading down to cheaper substitute brands and shopping for groceries at low-price leaders like Wal-Mart Stores Inc. (WMT - Analyst Report) and Costco Wholesale Corporation .

The company presently retains a short-term Zacks #2 Rank (Buy) for the next 1-3 months on the basis of company’s healthy second-quarter results and continued dividend increases. However, we retain our long-term ‘Neutral’ recommendation on the stock.