'Restock' This Dividend Grower Immune to the Covid-19 Recession

The coronavirus crisis caused the U.S. economy to officially slip into recession in February, ending the longest economic expansion in the history of the nation. And the effects of the coronavirus crisis are likely to linger well into 2021. Many companies have had to cut or suspend their dividends as a result of collapsing sales and profits, particularly in the retail, restaurant, and travel industries. On the other hand, grocery stores are performing exceptionally well in a time when so many other industries are struggling. Kroger Co. is the largest supermarket chain in the U.S., and the company has thrived during the periods of nationwide stay-at-home orders. Kroger also recently increased its dividend by a hefty 12.5%, reflecting its strong performance in such a difficult period. With a market-beating yield and over 10 consecutive years of dividend growth under its belt, Kroger is a blue-chip dividend growth stock. Thriving in a Pandemic Founded in 1883, Kroger is the largest supermarket chain in the U.S. The company has over 2,700 retail stores under a variety of brand names, 1,500 fuel centers, 2,200 pharmacies and 250 fine jewelry stores in 35 states. The company serves more than 60 million households every year. Kroger is one of the rare beneficiaries of the coronavirus pandemic, as the company has seen significantly higher traffic and sales. As many states across the U.S. announced stay-at-home orders, consumers stockpiled their pantries with food, beverage, and staples items. Kroger has seen a sizeable boost as a result. Kroger recently reported strong fiscal first-quarter results. For the quarter Kroger reported $41.55 billion in sales, up from $37.25 billion in Q1 fiscal 2019. Total sales excluding fuel and dispositions were up an exceptional 19.1% as the company saw an enormous benefit from stockpiling due to the Covid-19 crisis. Digital sales were up 92% year over year. Adjusted operating profit equaled $1.45 billion compared to $957 million in Q1 2019. On a per-share basis, adjusted EPS totaled $1.22, up 69% from $0.72 in the same quarter last year. Previously Kroger provided 2020 guidance for sales being up more than 2.25% and adjusted EPS coming in between $2.30 and $2.40. As a result of the uncertainty surrounding the Covid-19 pandemic Kroger has withdrawn this guidance, but the company does anticipate this year's results to exceed prior expectations. Therefore, 2020 is likely to be another year of strong growth for Kroger, which is even more impressive in the context of the coronavirus pandemic. Expect Continued Growth for Kroger Since 2008, Kroger has grown EPS by roughly 8% per year. Investors should expect Kroger to continue generating steady growth even after the coronavirus ends, the result of its various strategic initiatives put in place to fed off rising competition. Kroger has been on a roller coaster ride since the summer of 2017, when Amazon acquired Whole Foods for $14 billion. However, nearly three years later, the actual impact on Kroger has been much less than initially feared. Nevertheless, the competition in the retail sector has heated up with Amazon and Walmart expanding grocery delivery service, and lowering prices of their own. Kroger, which has successfully responded to the competition so far, initiated a strategic plan called Restock Kroger, which aims to increase its operating income by $400 million by 2020 by maximizing its efficiency and its cost savings. Kroger stock is also appealing because of the recession-resistant nature of its business model. Consumers will always need groceries, even during a recession. This has kept Kroger profitable during previous recessions, which is a major competitive advantage. During the Great Recession, Kroger stayed afloat with EPS of $0.95, $0.87, $0.87, and $1.00 during the 2008-2011 stretch. We expect Kroger to remain highly profitable this year, even with the U.S. officially entering a recession in February. Shareholders benefit from Kroger's steady profits with excellent dividend growth. The company recently increased its quarterly dividend by 12.5%, representing its 14th consecutive year of rising dividends. Kroger is on the list of Dividend Achievers, a group of stocks that have raised their dividends for at least 10 consecutive years. Since 2006, when Kroger reinstated its dividend program, the company has increased its dividend by more than 10% per year. Going forward, Kroger will pay a quarterly dividend of $0.18 per share, which amounts to $0.72 per share annually. This represents a forward yield of 2.1%. While Kroger is not the highest-yielding stock around, it does beat the 1.9% average yield of the S&P 500 Index. And, Kroger provides the additional bonus of high dividend growth from year to year. Another factor boosting the company's chances of outperforming during a recession, is its strong balance sheet. The company has worked to pay down debt over the past few years. Kroger's net-total-debt-to-adjusted EBITDA ratio is 1.81x, compared to 2.54x a year ago. Kroger's cost-cutting program has helped it lower debt, and now its leverage ratio is actually below the company's target range of 2.30x to 2.50x. Kroger held temporary cash investments of approximately $2.3 billion as of the end of the quarter. If anything, Kroger could actually raise debt right now, which would be a financially savvy move considering interest rates are at historic lows. These funds could be used for a variety of purposes, including investment in growth initiatives, or returning even more cash to shareholders. Final Thoughts In an investing climate marked by great uncertainty, Kroger is generating excellent financial results and is rewarding its shareholders with rising dividends. The coronavirus crisis has dealt a huge blow to many companies across virtually all industry groups, but grocery stores are a haven for investors right now. Kroger is not likely to be known as a growth stock, but it generates strong profits with steady growth from year to year, even during a recession. The stock has an above-average yield and a long history of increasing its dividend, making Kroger an attractive stock for risk-averse dividend growth investors.

'Restock' This Dividend Grower Immune to the Covid-19 Recession

In an investing climate marked by great uncertainty, this name is generating excellent financial results and rewarding its shareholders with rising dividends.

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