Stick Around for Dividends at Roundy's
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Roundy's (NYSE: RNDY) supermarket chain only recently started trading on the New York Stock Exchange. Two things about this stock immediately caught my eye, its P/E ratio and its trading range. The supermarket chain's shares have already risen from $8.50 per share at the February 8th IPO to nearly $12 a share. Even after rallying nearly 50 percent, Roundy's still has a P/E ratio of just 7.40, suggesting serious value potential here.
Roundy's is based in Wisconsin and also has stores in Minnesota and Illinois. In the Midwest, Roundy's is a major supermarket chain, although it hasn't expanded throughout other parts of the United States. The company boasts five individual supermarket brands and owns 93 Pick 'n Save stores, 32 Rainbow stores and 26 Copps stores, and in 2011 it operated 158 supermarkets in total, according to its 2011 10-K.
Roundy's doesn't add a large number of stores each year, as it had 153 stores in 2007. The supermarket's decision to add stores slowly actually gives me greater confidence in its management. Many retailers opened up too many stores during the early 2000s, and had to shut down lots of their stores in 2008 and 2009 because of the weak economy. Roundy's results for the quarter show some improvement anyway, as its 4Q 2011 figures show 2.1 percent higher revenue and 6.6 percent higher earnings than it reported in 4Q 2010.
Roundy's competitor, SuperValu (NYSE: SVU) is based in Minnesota. SuperValu is a major national grocery chain and it operates around 2500 stores, which include Cub Foods and Osco stores. Even with its much larger size, SuperValu's $1.15 billion market cap is only slightly more than twice Roundy's market cap of $534 million. Although SuperValu seems like it also has value potential, this supermarket chain reported a loss of $2.46 per diluted share in 2011. Roundy's reported income of $1.58 per diluted share in 2011, so it looks like a safer investment.
Roundy's annual income statement shows a stable company. The supermarket's revenue, cost of goods sold, and operating costs look fairly flat for the last five years, so this isn't a company for investors who are looking for massive growth. The main attraction for Roundy's investors is its dividend potential. Roundy's 10K lists a dividend of $2.90 per share in 2010. Doris Hajewski, at the Journal Sentinel, reported that Roundy's did take out a $150 million loan to make this payout. Roundy's did report income of $46 million in 2010 and $48 million in 2011, so its earnings are high enough to pay a smaller dividend.
Yahoo Finance shows that SuperValu has a dividend yield slightly over 6 percent, although the drop in SuperValu's stock price over the past year has contributed to its high yield. Roundy's dividend might be even higher. According to Kirsten Chang for CNBC, on March 30th, Jim Cramer announced that Roundy's planned to pay a dividend which would provide a yield of around 8.5 percent. Roundy's stock price rose from slightly below $11 to slightly less than $12 in the next few days after Cramer's announcement.
Safeway (NYSE: SWY) has a 2.9 percent dividend yield that is more typical for a supermarket. With annual earnings per diluted share of $1.49, Safeway can afford to pay quarterly dividends of 14.5 cents per share without trouble. Roundy's is earning slightly more per share than Safeway right now, and Safeway has a P/E ratio of 13.3, so Roundy's looks like a real bargain. Safeway's P/E is still relatively low for a supermarket chain, so I also think this Safeway looks like a good choice for dividend investors. I'd pass on SuperValu until its earnings can cover its dividend.
The Motley Fool owns shares of SUPERVALU INC. enovinson has no positions in the stocks mentioned above. 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.