I generally try to eschew acquisitive companies, as acquisitions have such a poor track record of destroying shareholder value. That said, there are companies that seem to have the capacity to acquire and integrate successfully.
One company that has successfully integrated with merger partners over the years is Kroger Co.. The merger with Dillons was a success, as were those with Fred Meyer, and Harris Teeter. More recently, the jury is still out on the recent merger with Roundy’s, but I’m optimistic about it for the long term. This demonstrated success of growing the business through mergers, coupled with the discounted share price, is the reason I want to review the company. In my view, this is a great long-term hold for investors. I’ll make some observations about the financial history of the firm, model the dividend, and conclude with a succinct discussion of the stock.
On March 2nd of this year, the company held a conference call in which they walked analysts through a disappointing 2016. In spite of achieving the 12th year of market share gains, the market focused on the decline in margins, and the fact that 2016 was a disappointing year. It is true that 2016 broke a long track record of net income gains, because net income dropped 3% from 2015, in spite of a 5% increase in revenue. That is indeed a troubling situation, but a drop of 9% in the share price may be a bit excessive and that excessive reaction, it seems to me, creates an opportunity for us.
Financial Snapshot
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Apart from the drop in net income mentioned above, there are some other things to mention, notably the debt levels and the relatively aggressive buybacks and dividend growth over time. Since 2011, the company has repurchased somewhere around $7.1 billion of shares and has paid shareholders just under $2 billion in dividends. More relevant still, these two activities are generally trending upward. I conclude, therefore, that this is a fairly shareholder-friendly management.
Date: April 11, 2017