The art of luring consumers to buy new products has some things in common with the art of getting investors to purchase stocks.
As the cover feature in this week's issue points out, consumers of the future may be enticed to fill their shopping carts with products that include a little something extra: functional foods that offer added benefits. Wall Street shoppers might also be looking for a little something extra when they buy supermarket stocks: a dividend.
Only a handful of the 33 food retailing and wholesaling stocks tracked by SN pay a dividend, a differentiator some analysts said could be the reason certain food stocks have been outperforming others.
In the first-half stock performance analysis in last week's SN, for example, Jonathan Ziegler, a principal in PUPS Investment Management, Santa Barbara, Calif., pointed out that the stock of Albertsons, Boise, Idaho, appears to have been buoyed at least in part by its dividend.
Albertsons, which offers a 3% dividend yield, saw its stock gain 17.17% in the first half, despite results that were no better than those of its peers.
A confluence of factors indicates this might a good time for more supermarket companies to consider using some of their abundant free cash flow to pay a dividend to shareholders. For one, the fast-growth period of the late 1990s is over, leaving investors to be more selective about their stock purchases. For many institutional investors, offering a dividend is a minimum requirement for a stock to even be considered.
Another factor is that growth of alternative food retailing channels like supercenters, club stores and dollar stores is putting extreme pressure on the growth efforts of traditional supermarket operators. Some analysts posit that now would be a good time for supermarkets to shift into a more defensive stance that would allow them to focus on growing earnings at a slow, steady pace by cutting back on capital expenditures.
"The challenge is that this isn't a growth business, but companies are acting like it is," said Jason Whitmer, analyst, FTN Midwest Research, Cleveland.
Both Kroger, Cincinnati, and Safeway, Pleasanton, Calif., have said they would consider offering a dividend in the future. In doing so, they would join such other major players in the industry as Supervalu, Minneapolis; Whole Foods, Austin, Texas; and Nash Finch, Minneapolis, all of which saw their stocks gain in the first half.
Mark Wiltamuth, analyst, Morgan Stanley, New York, also called upon Kroger and Safeway to begin offering dividends. This would be preferable to Kroger's current strategy of using its excess cash to buy back stock, he said, because committing to a dividend would force the company to be more disciplined in how it invested its cash.
The adoption of strategies that are more appropriate for mature industries, combined with a dividend, will increase the attractiveness of supermarket stocks for investors, stated Wiltamuth.
"This group historically is supposed to be a safe haven in times of trouble," he said. "Because the fundamentals have been so poor, it has been nothing but a value trap for investors."