Roundy’s Goes Round and Round

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To say that Milwaukee-based Roundy’s (NYSE: RNDY) has had a tumultuous month may not do justice to the stock’s price action that has been more rollercoaster than merry-go-round since its most recent quarterly results were released. The stock, which had fallen nearly 30% month-to-date, enjoyed an impressive holiday week in which it rallied by nearly 17%.

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RNDY data by YCharts

Central to this wild ride has been the company’s oversized dividend that was cut in half in conjunction with the earnings release. Even with the reduction and recent rally in the stock’s price, Roundy’s shares still carry a dividend yield of 11%. Ultimately, the company is in a brutal industry without sufficient differentiation to let it stand out. If you are considering trying to capture a bit of yield by jumping in, learn a little Latin: caveat emptor – may the buyer beware.

Dividend Dipsy-Doo

Until recently, Roundy’s was carrying a dividend yield of over 16% which distributed greater than 80% of earnings to its shareholders. When the last quarter’s results saw net income fall on a year-over-year basis from $12.4 million to $7.9 million, or $0.41 per share to $0.18 per share, the company realized it was time to cut the dividend. As part of its earnings release, Roundy’s announced that it was slashing the quarterly dividend from $0.23 per share to $0.12 per share.

The dividend reduction, which still left the company sending 67% of earnings out the door, sparked an immediate 20% selloff in the stock. As the stock continued to slide, the dividend yield popped back up to 12.9% before settling at 11% after last week’s rally. The takeaway from this dividend yield yo-yo is that the dividend is by no means something to count on over the extended term unless margins significantly improve.

Other Metrics

While Roundy’s looks attractive across a variety of metrics, when you really dive into the numbers there are some major warning signs. On the positive side, the stock is trading at a trailing P/E of roughly 4.6 relative to 7.8 for Safeway (NYSE: SWY) and 23.2 for Kroger (NYSE: KR). Roundy’s has an operating margin of 3% relative to 2% for these two competitors, and carries the most attractive PEG ratio of the group. Supervalu (NYSE: SVU) has negative earnings and also carries an operating margin of 2%. Safeway has a 4.1% dividend yield, Kroger pays 2.4% and Supervalu does not offer a dividend.

Where things are decidedly less appealing is in the high level of debt carried by Roundy’s and its razor-thin profit margin, which is low even by industry standards. With shrinking profits and a falling dividend, the company is in need of some belt-tightening and refocusing. CEO Robert Mariano seems to understand the issue and is focused on shaking things up: “As we look ahead, we are carefully examining our entire operation for ways in which we might improve sales and earnings and, accordingly, have already made adjustments to our pricing and promotions to drive our performance.”

Another risk that is hard to quantify is the role being played by discounters like Wal-Mart (NYSE: WMT) as they push deeper into the grocery segment. With pricing power on both volume and insulation from the sale of non-grocery items, discounters have been a disruptive force across the board. As such it is hard to be particularly positive on any part of the grocery industry.

The Trade

While there is a very thin argument to be made for capturing Roundy’s dividend on even a short-term basis, after last week’s run, I would look for better opportunities. The dividend will likely be cut again in the near-term and the company faces too many challenges to warrant an allocation. At current levels, there are simply better uses of capital.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Supervalu. Motley Fool newsletter services recommend Supervalu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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