Kroger Co (NYSE: KR) has been struggling to generate sustainable growth in revenue and earnings. The company’s revenue grew only 4% in the past three years while operating earnings declined 12% during the same period. However, its earnings per share are growing at a faster pace than revenue growth, thanks to its strategy of reducing outstanding shares.
On the back of slower revenue growth, its shares are also underperforming compared to industry peers. Its share price rose only 2% in the past twelve months, but the stock price is down 24% in the past three years.
Although Kroger has raised its dividends every year over the last twelve years, the company’s future dividend growth looks questionable amid slower revenue growth. The meeker revenue and earnings growth are also negatively impacting its cash generation potential. The company has generated negative free cash flows of $297 million in the latest quarter. This means that Kroger is supporting its dividend from external sources, which isn’t a good sign for big dividend hikes.
The company’s financial numbers are struggling due to increasing market competition and the arrival of private labels. Its CEO says, “Kroger is transforming its business model. We’re moving from a traditional grocer to a growth company with both a strong customer ecosystem that offers anything, anytime, anywhere and asset-light, high-margin alternative partnerships and services.”
The company expects its GAAP net earnings guidance in the range of $3.80 to $3.95 per diluted share for fiscal 2018, down from previous guidance for $3.88 to $4.03 per diluted share.
Analysts are pessimistic about the future fundamentals of Kroger. Buckingham Research, for instance, provided an Underperform rating to KR shares – with the price target of $24. Its shares are currently trading close to $28 a share. Bleak financial outlook, transformation strategy, and limited dividend growth potential are likely to put more pressure on Kroger share price in the following months.
Dividend investors, on the other hand, always like to invest in companies that have the capacity to generate sustainable double-digit growth in financial numbers to support dividend growth and share price appreciation. Overall, the financial headwinds along with negative share price movement make Kroger a bad play for dividend investors.