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Kroger OKs ‘Substantial’ Dividend Hike

“This substantial dividend increase demonstrates the confidence of our board of directors that the customer 1st strategy will produce strong returns for shareholders.” — David B. Dillon, chairman and CEO, Kroger

CINCINNATI — Responding to a sluggish stock price and investors who long complained its payout was too low, Kroger Co. has approved what it called a “substantial” increase in its quarterly dividend.

The company said it would pay a dividend of 15 cents per share on Dec. 1 to shareholders of record as of the close of business on Nov. 15. That represents a 30% increase from its last quarterly dividend, of 11.5 cents per share.

David Dillon“This substantial dividend increase demonstrates the confidence of our board of directors that the customer 1st strategy will produce strong returns for shareholders,” David B. Dillon, Kroger’s chairman and chief executive officer, said in a statement. “The 30 percent increase demonstrates our ability to continue to generate strong free cash flow and operating results.”

Kroger reinstated its dividend six years ago but was languishing among peers in the retail field both in its yield — or its dividend as a percent of its stock price — and in payout ratio, or the percentage of earnings distributed to shareholders.

Read more: Analysts Ponder: Is Kroger All It Can Be?

John Heinbockel, an analyst with Guggenheim Securities, in a research note said the dividend increase was “a big step in the right direction,” as the retailer looks to increase the value in its stock, which is languishing along with most publicly traded supermarket operators despite outperforming most of them on a relative basis.

Trading near its lowest price-to-earnings valuation in almost a decade, Kroger is also aggressively buying back its own stock. Company officials while reviewing quarterly financial results last month said the company had completed more than half of a $1 billion stock repurchase authorization given by its board of directors in June by the end of the second quarter in August.

Yield Increased to 2.5%

Estimating an annual dividend of 60 cents per share and a valuation of $23.92 (as it was trading when Kroger announced the dividend), Kroger increased its yield from 2% to 2.5% and its payout ratio from 19.2% to 24.9%.

Combined with an expected return of inflation in 2013, Heinbockel said the dividend could provide a lift for the stock. Heinbockel said he expected inflation of between 3% and 4% in 2013, up from around 1% this year.

Read more: Kroger Sales Up, but Taxes Nip Earnings

Andrew Wolf, an analyst at BB&T Capital Markets, Richmond, Va., said Kroger’s stock is badly undervalued, but he is a strong advocate for buying back the stock while it remains a cheap.

“Maybe there’s a certain [dividend] yield level to get to that would get more investors to buy the stock. I’m not saying that’s not valid to think about,” Wolf told SN. “I’m just saying the stock is undervalued so buying it back it’s a no-brainer.”

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