Kroger stock target lifted, keeps rating on strong growth prospects

On Monday, Argus increased its price target for Kroger Co . shares (NYSE: NYSE:KR) to $72 from $70, while maintaining a "Buy" rating on the stock. The firm cited several factors contributing to Kroger's positive outlook, including the company's affordable private brands, effective customer analytics for personalized discounts, and a focus on fresh foods. Moreover, the convenience of online ordering and curbside pickup available at nearly all Kroger locations was highlighted as a strength.

The analyst from Argus noted that Kroger's prospects are further supported by a consistent increase in dividends over the past five years. On June 27, Kroger announced a 10% increase in its quarterly dividend, bringing it to $0.32 per share. This dividend growth is part of the reason for the firm's optimism about the grocery chain's financial performance.

In terms of earnings projections, Argus has raised its FY25 earnings per share (EPS) estimate for Kroger to $4.44, up from the previous estimate of $4.40. This adjustment reflects the firm's confidence in Kroger's ability to continue its growth trajectory and deliver value to shareholders.

The valuation model used by Argus incorporates a five-year growth rate estimate of 6%, a 25% dividend payout, and a 7.75% cost of equity. Following this initial phase, a steady-state growth phase is assumed with a 3% growth rate, a 75% payout, and a 7.5% cost of equity.

Based on these parameters and applying a multiple of 17 times the FY25 EPS estimate, Argus suggests that Kroger's shares could potentially be valued at $75. Using a slightly more conservative multiple of 16 times the FY25 EPS estimate, the valuation would be around $71, thus supporting the new $72 target.

In other recent news, Kroger Co. has seen a series of developments. According to Wells Fargo, the company is expected to outperform in the second quarter, potentially surpassing expectations, leading to an upward revision of its future outlook. This anticipation is based on improvements in grocery same-store sales, stable margins, contributions from alternative value streams, and robust profitability from fuel sales.

Kroger's prospects are further bolstered by the expected resolution of an overhang involving Albertsons (NYSE:ACI) Companies Inc. by September, which is anticipated to remove uncertainties. Kroger has reported modest growth in its first quarter of 2024, with identical sales up by 0.5% and digital sales marking an increase of over 8%. The company's delivery solutions expanded by 17%, contributing to an adjusted FIFO operating profit of $1.499 billion.

In addition, the company announced an increase in its quarterly dividend to 32 cents per share, marking the 18th consecutive year of dividend growth. This decision reflects the Board's confidence in Kroger's business model and its ability to generate strong free cash flow.

During the recent annual meeting, Kroger shareholders voted on several key issues, including the re-election of directors and shareholder proposals. However, four shareholder proposals did not pass, including a report on the public health costs from the sale of tobacco products, a listing of charitable contributions of $10,000 or more, the adoption of a living wage policy, and a just transition report.

InvestingPro Insights

The recent update from Argus on Kroger Co. aligns with several metrics and insights available from InvestingPro. Notably, Kroger has demonstrated a commendable track record with its dividend policy, raising its dividend for 19 consecutive years—a testament to its financial stability and commitment to shareholder returns. This aligns with Argus's positive outlook on the company's consistent dividend increases.

InvestingPro Data shows that Kroger's market capitalization stands at $39.5 billion, with a solid price-to-earnings (P/E) ratio of 18.4, which is adjusted to 11.5 for the last twelve months as of Q1 2025. This suggests a reasonable valuation compared to industry peers. Additionally, the company's revenue growth, though modest at 0.89% for the last twelve months as of Q1 2025, indicates steady business performance.

InvestingPro Tips highlight that Kroger is a prominent player in the Consumer Staples Distribution & Retail industry and has been profitable over the last twelve months. These factors may provide investors with confidence in the company's ability to navigate market conditions and maintain profitability.

For those looking to delve deeper into Kroger's financial health and future prospects, InvestingPro offers additional tips and insights. To explore these, readers can visit https://www.investing.com/pro/KR and use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, with many more tips available to guide investment decisions.

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