PLEASANTON, Calif. -- Safeway here expressed confidence in its future earnings power last week by declaring a quarterly dividend -- the company's first dividend since it went public in 1990.
The initial dividend will pay 5 cents a share on July 17 to shareholders of record on June 16.
Analysts contacted by SN were divided in their reactions to the dividend, with several pointing to the small amount of the payout and the potential negative impact on the company's ability to continue generating strong free cash flow.
Steve Burd, chairman, president and chief executive officer, announced the dividend at last week's annual meeting here, noting the company's decision to initiate a dividend was based on the record $1.1 billion in free cash flow it generated in 2004 -- "the single best year of free cash flow in the company's history," he noted.
"Despite undertaking the largest remodeling program in the last 13 years, we still have free cash flow, and we felt this was a good time to declare a dividend and begin returning some money to shareholders."
Robert Campagnino, an analyst with Prudential Equity Group, New York, said in a written report he views Safeway's decision to adopt a dividend as a positive sign for its profit outlook. "There is an important signaling component to this decision, and that signal is that Safeway management is comfortable that the difficulties that have led to the earnings erosion of the past couple of years may be moderating."
With the dividend amounting to approximately $90 million this year, Safeway will still be able to use cash flow to reduce debt and continue to remodel and upgrade stores, Campagnino added. "For a company that has not paid a dividend nor repurchased shares but has significant cash-generating ability, this move makes sense as it allows investors to get paid a little during what has been a very difficult period for food retailing stocks," he said. "This move may also make shares of Safeway attractive to a broader range of value-oriented investors."
Other analysts expressed less enthusiasm.
John Heinbockel, an analyst with Goldman Sachs, New York, said the benefit from the dividend "is fairly small and insufficient to overcome the strategic positioning and more compelling valuation of" other retail food stocks, particularly Supervalu and Kroger.
One of the downsides of Safeway's decision to pay a dividend, Heinbockel pointed out, is "it will eat into free cash flow and modestly reduce financial flexibility, [which] only becomes an issue if the profit recovery stalls out or reverses course."
Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., told SN the dividend "opens Safeway up to more investment consideration by mutual funds that now see it has an income component. However, at a yield of 0.9%, a dividend of 5 cents a share is pretty modest for a retailer. That's a level you usually see with a growth company, not a mature company that's more cash-flow-oriented."
Wolf said Safeway's dividend yield is comparable to a yield of 0.8% at Whole Foods Market, "which is a growth stock," he pointed out, but smaller than the 1.9% yield at Supervalu or the 3.6% yield at Albertsons.
Jay Whitmer, an analyst with Midwest Research, Cleveland, told SN he has some concerns about the decision to use free cash flow to pay a dividend. "For a company like Safeway that's trying to accelerate capital spending with extensive remodeling, there's a healthy concern whether it has enough legroom on free cash flow. Spending some of that money on the dividend doesn't leave a lot of wiggle room to have money left over to invest in stores and still pay down debt.
"For it to work, Safeway's business would have to get a lot better."
Whitmer said he believes Safeway's dividend announcement "puts pressure on Kroger because it is now the odd man out. But Kroger is not ready for a dividend because it's buying back shares a lot more aggressively and feels that provides a better return. But at some point, Kroger will have a dividend, and it has the best free cash flow of any of the major three to afford it."
In contrast to last year's annual meeting, when a coalition of labor groups sought to topple Burd and oust other directors, this year's Safeway meeting was calm. All nine directors were re-elected with votes of 95% or more, and although shareholders put forth eight proposals for changes in the way the company is run, all eight were defeated.
In response to a shareholder's question, Burd defended his annual salary of $1.3 million, including a $300,000 raise he received last July -- his first in five years, he noted -- explaining his compensation had been running significantly behind the market-based wages of his peer group.
