A Close Look at Kroger, Co.’s Double-Digit Dividend Increase

If Kroger‘s (NYSE: KR) momentum wasn’t already evident when the company reported its better-than-expected results earlier this month, management just gave investors another reason to believe things are going well at the grocer. On Thursday, Kroger announced a 12% increase to its quarterly dividend — a significant step up from its 4% dividend increase last year.

The strong dividend increase comes on top of Kroger’s aggressive share repurchase program, which was updated earlier this year. Between its share repurchase program and its notable dividend increase, Kroger is prioritizing its strategy to deploy its excess cash to create shareholder value.

Here’s a look at Kroger’s just-announced dividend increase and its broader capital return program.

Image source: Getty Images.

Returning capital to shareholders

Payable on Sept. 1 to shareholders of record on Aug. 15, Kroger is increasing its quarterly dividend from $0.125 to $0.14. This is a much bigger increase than the company’s half-cent increase to its quarterly dividend last year.

“Kroger’s dividend increase reflects our Board of Directors’ confidence in our Restock Kroger plan,” said Kroger CEO Rodney McMullen in the company’s press release about the dividend increase. Kroger’s Restock Kroger plan is an initiative aimed at improving store operations and customer experiences, helping boost revenue while controlling costs. In its first-quarter update earlier this month, Kroger said it was “slightly ahead of the company’s internal expectations due to the great start to Restock Kroger, including process changes that led to especially strong cost controls and alternative revenue streams.”

Between its share repurchases and dividends, Kroger has returned large sums of capital to shareholders recently.

Last June, Kroger replaced its $500 million share repurchase program with one that doubled its size. Then Kroger announced another incremental $1 billion share repurchase program in March, when just $76 million of its previous $1 billion authorization was remaining.

These share repurchase programs helped Kroger return more than $2.1 billion to shareholders through dividends and repurchases in 2017. Further, in the last 12 months, share repurchases have totaled $2.7 billion — a figure Kroger was able to achieve with the help of using $1.1 billion of the after-tax proceeds it received from the recent sale of its convenience store unit.

As far as dividends go, Kroger has paid $442 million to shareholders over the past 12 months.

Kroger was able to do all of this while investing $3 billion of its capital.

More dividend growth ahead

This dividend increase extends Kroger’s growing track record of strong dividend growth. Since reinitiating its dividend in 2006, the company’s dividend has increased at an average rate of 13%. And investors have good reason to expect more meaningful growth in the years ahead.

Not only does Kroger’s low payout ratio (the percentage of a company’s earnings being paid out in dividends) of just 23% suggest the grocer has plenty of room for further dividend growth, but Kroger’s business is growing. In Kroger’s first quarter, sales and adjusted earnings per share increased 3.4% and 26%, respectively. In addition, management said it expects same-store sales to rise a nice 2% to 2.5% in 2018 when excluding fuel.

Kroger’s healthy business and its ability to return substantial cash to shareholders highlight the company’s attractiveness as a long-term dividend stock. Accounting for its 12% dividend increase, Kroger boasts a meaningful forward dividend yield of 2%.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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