If you look around for intermediate-term earnings growth estimates for Cincinnati, OH-based grocer Kroger you’ll likely see something in the 6% to 10% range. The company has a slightly more upbeat view, recently affirming an 8% to 11% long-term earnings-per-share growth target. Either possibility could lead to quite reasonable gains for the current or prospective Kroger shareholder. I’ll show you what I mean.
For 2016 Kroger has told investors to anticipate $2.10 to $2.15 in adjusted earnings-per-share; call it $2.12 for our purposes. In addition, the company also had this to say about the future:
“Over the long term, Kroger is committed to achieving a net earnings per diluted share growth rate of 8 – 11%, plus a growing dividend.”
Personally I’d replace “is committed to” with “has a goal of” above, but that’s just me. Still, this can give investors a guidepost as to how management is thinking about the business.
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At a 9.5% average compound growth rate, $2.12 in earnings would turn into $5.25 or so in per share earnings after a decade. Your guess is as good as mine as to a future earnings multiple, but something in the 14 to 16 range has been fairly typical. At 15 times earnings, shares would be trading around $79 in 10 years.
In addition, Kroger also pays a $0.12 quarterly dividend or $0.48 on an annual basis. If this payout were to grow in line with earnings, you’d anticipate collecting $8 or so in cash dividends during this period. Some might suggest that the dividend could increase faster than earnings due to the lower payout ratio, but we’ll stay somewhat cautious in this regard.
In total you’d anticipate a combined value of about $87. As compared to the current quotation near $34, this would equate to an average compound gain of nearly 10% per annum.
Date: February 29, 2017