The Federal Reserve has adopted an exceptionally aggressive policy this year to bring inflation back to its long-term target of 2%. To that end, it has raised interest rates at a record pace this year. Moreover, he intends to increase them even more next year. Higher interest rates slow down the economy, because they reduce the total amount of investments and, therefore, they increase the risk of a future recession.
Grocery stocks are not immune to recessions, but they have proven to be quite resilient as consumers have to shop for groceries even in the most adverse economic conditions. In this article, we will discuss the outlook for three grocery stocks. These companies have proven to be fairly resilient to recessions and offer reliable dividends.
Founded in 1883, Kroger (NYSE:KR) is one of the largest retailers in the United States. The company has nearly 2,800 retail stores under two dozen banners, as well as gas stations, pharmacies and jewelry stores in 35 states.
Thanks to its huge network of stores, Kroger enjoys significant economies of scale. However, competition has intensified more than ever in the retail sector in recent years. As a result, Kroger operates with extremely thin margins. Thus, a significant trade gap is missing.
On the other hand, Kroger has proven resilient during recessions. During the Great Recession, when most companies saw their profits plummet, Kroger suffered a mild 8% decline in earnings per share, from 95 cents in 2008 to 87 cents in 2009. During the pandemic coronavirus, Kroger performed even better. Thanks to the lockdowns imposed in response to the pandemic, consumption at home has increased sharply. Thus, Kroger increased its EPS by 58%, from $2.19 in 2019 to an all-time high of $3.47 in 2020.
Even better, the company maintained its positive momentum, with EPS growth of 6% in 2021 and expected growth of 11% this year. Kroger benefited from its “Restock Kroger” project, which improved the company’s efficiency and improved its operating margins. Net income was also supported by significant share buybacks. As Kroger’s stock has traded at low price-to-earnings (P/E) ratios in recent years, share buybacks have significantly improved shareholder value.
In mid-October, Kroger announced that it had agreed to acquire Albertson (NYSE:AIT) for $24.6 billion. With the value of the deal being 75% of Kroger’s market capitalization, it is obvious that this acquisition is major for the company’s future prospects. Regulators fear that this agreement will lead to higher prices for consumers. As a result, no one can be completely sure that the deal will materialize. Still, if the deal is approved by regulators, it will likely prove to be an important growth driver for Kroger.
Kroger has a decent dividend growth record. It has increased its dividend for 17 consecutive quarters and has increased its dividend by an average of 14% per year over the past five years. The stock currently offers a dividend of 2.3%, which is a nearly 10-year high for the stock. Given its healthy payout ratio of just 25%, Kroger should continue to increase its dividend for many years to come, although it will likely have to cut its dividend growth rate if it spends $24.6 billion to the aforementioned acquisition.
Founded in 1902, Target (NYSE:TGT) has approximately 1,850 big-box stores, which offer general merchandise and food and serve as distribution points for the company’s burgeoning e-commerce business. After a failed attempt to expand into Canada, Target operates solely in the US market.
Due to intense competition and excessive losses incurred during its attempt to expand, Target failed to grow its EOS significantly between 2012 and 2017. However, through its turnaround efforts, Target has returned to its long-term growth trajectory in recent years. Notably, the retailer increased its EPS by 47% in 2020, partly thanks to the tailwind of the pandemic, and by another 44% last year. Over the past decade, the company has increased its EPS by an average of 13% per year. It also proved quite resilient during the Great Recession, when EPS fell just 14%.
Unfortunately, Target has been badly hit by inflation soaring to its highest level in 40 years this year. Due to excessive inflation, the company suffered a sharp contraction in its operating margins. Additionally, the surge in inflation has made consumers more conservative in their discretionary spending. As a result, Target experienced weak demand. Thus, its stocks have increased sharply. Due to these headwinds, the company is on course to experience a nearly 60% drop in EPS this year. This helps explain the stock’s 42% drop from its April peak.
On the positive side, thanks to aggressive interest rate hikes, inflation is expected to decline in the coming years. As a result, Target is likely to improve its margins from its very thin current levels. The company also has important growth drivers, namely its small format stores and its share buybacks.
Target has increased its dividend for 54 consecutive years and therefore belongs to the Dividend Kings. The company has increased its dividend by 20% this year and its payout ratio has increased from 23% in 2021 to 79% now. However, thanks to the expected recovery in its business, Target will probably be able to continue to increase its dividend for many years to come. Therefore, the stock’s 2.8% return should be considered safe. In addition, the 20% dividend increase announced in June demonstrates management’s confidence in the company’s turnaround.
SpartanNash (NASDAQ:PSTN) is a value-added wholesale food distributor and retailer. It supplies 2,100 independent grocery stores in the United States and also owns 147 supermarkets in nine states. SpartanNash operates under retail banners such as Dan’s Supermarket, D&W Fresh Market, Econofoods, Family Fare, Forest Hill Foods and No Frills. The company is also a distributor of groceries for US military commissars.
SpartanNash has been far less affected than Target by soaring inflation this year. The retailer has been able to partially offset rising costs in its supply chain through improved efficiency and cost reductions. With just a quarter remaining, the company expects to grow sales from $8.9 billion in 2021 to between $9.5 billion and $9.7 billion this year. This implies a growth of 8% at the midpoint. It also plans to grow its EPS from $1.70 in 2021 to $2.27-$2.37 this year, implying 36% mid-term growth.
On the other hand, SpartanNash has a remarkably volatile performance record. The company has grown its EPS by only 2.2% per year on average over the past decade, with pronounced volatility. Given that the retailer is on track to post near-record EPS this year, investors should be aware of its volatile performance.
During the Great Recession, SpartanNash suffered a 25% decline in earnings per share. As a result, it performed worse than Kroger and Target, but still proved to be quite resilient to recessions. The company has increased its dividend for 12 consecutive years and currently offers a dividend yield of 2.7%, with a payout ratio of 36%. Thanks to SpartanNash’s healthy payout ratio and manageable amount of debt, its dividend should be considered safe. In contrast, the company has only increased its dividend by an average of 5% per year over the past five years. Given the retailer’s volatile performance, it’s prudent not to expect larger dividend increases in the future.
As of the date of publication, Bob Ciura held (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.