Krogers (NYSE:KR) attempted takeover of Albertsons (NYSE:ACI) failed, leaving Albertson’s investors wondering what would come next and Kroger’s in an envious position. Although there is a risk of litigation and the potential for a $600 million termination fee, it is small potatoes to the balance sheet improvement, capital position and returns.
Two years ago, Kroger suspended its share repurchase program to shore up its balance sheet and build cash for the acquisition. Now that the acquisition is out of the picture, the company’s balance sheet is as healthy as ever, and buybacks have resumed.
Kroger’s Buybacks, Balance Sheet, and Dividend Make it a Good Buy
The company’s buybacks are noteworthy. They are set at $7.5 billion, with $5 billion in an accelerated program already 80% completed. The net is worth about 16.6% of the market cap, with shares trading near record highs at $62.25. The remaining portion is about 5.5% and is expected to be used within two to three quarters. Once exhausted, the company’s balance sheet and cash flow will allow regular repurchases and share reductions to bolster shareholder value further.
The balance sheet is a fortress. The company carries some debt with leverage at roughly 2X equity, but it is related to acquisition plans. The buyback announcement included plans for debt reduction, specifically the upcoming redemption of $4.7 billion in senior notes issued early in 2024.
Debt reduction and buybacks point to improving dividend health, including improved free cash flow and a lower share count, so distribution increases will likely be sustained at a high pace. The company is tracking for inclusion in the Dividend Aristocrats. It yields about 2% at record highs, pays less than 35% of its earnings, and has increased the annualized payout by a double-digit CAGR for the last five years.
Analysts Sentiment Improves in Wake of Failed Acquisition Attempt
The analysts' response to the failure of the merger is good. While some would have rather seen the merger move forward, the net result is positive, with uncertainty out of the picture. The activity since early December includes one upgrade to Buy and numerous price target increases that lifted the consensus estimate by 10% in under 30 days. Consensus puts KR stock at $66, which is good for a fresh all-time high and a 6% gain from critical resistance, while the revision trend and high-end range suggest another 20% is possible.
That puts the market near $75, a target that aligns with technical indications.
Institutional sentiment also supports Kroger’s price action. The institution sold on balance in Q1 2024 but reverted to buying in Q2 and sustained bullish activity steadily through the year’s end. The institutions own more than 90% of the stock, and ownership is broad, including numerous ETF and mutual fund managers and public and private investment capital, so it provides a strong tailwind for the market.
Kroger is at a Critical Turning Point; Higher Highs are Expected
Kroger’s price action was bullish in 2024 and ended the year strongly. The market is testing resistance at an all-time high and is indicated to move higher. MACD and stochastic are both bullish and suggest a move to new highs will come soon. Because the market would be exiting a multi-year trading range, the subsequent movement could be worth the range magnitude or about $20.
A $20 advance puts this stock near $72.50, aligning with the high end of the analysts' range. Assuming the upcoming earnings reports align with retail business trends, that could happen by the middle of 2025. 