Safeway Boosts Dividend

Zacks Investment Research

Major grocery chain Safeway Inc. (NYSE:SWY) recently announced a 21% increase in its regular quarterly dividend to 17.5 cents per share from earlier quarterly rate of 14.5 cents. The dividend will be payable on July 12 to shareholders of record as of June 21, 2012. 

Safeway has an effective capital deployment policy in place and strives to benefit shareholders through dividend payments and share repurchases. During the first quarter, the company repurchased 46 million shares for $1 billion. It additionally increased its share repurchase authorization by $1.0 billion to $1.1 billion.

Despite the prevailing volatile macro environment, Safeway possesses high earnings visibility, consistent cash generation ability and disciplined investment. At the end of the first quarter of 2012, Safeway had $134.5 million in cash and cash equivalents compared with $729.4 million at the end of 2011.

The company’s free cash flow in the first quarter declined to negative $224 million from positive free cash flow of $112 million due to higher capital expenditure of $308 million ($185 million in the year-ago quarter). In 2012, Safeway expects around $900 million in capital expenditures with free cash flow in the range of $850–$950 million.

However, with the completion of Lifestyle transformation program, we believe that Safeway’s capital expenditure will decline going ahead. We expect Safeway’s cash position to improve in due course, thus enabling the company to pay further dividends, repurchase shares and reduce its debt. 

We are also of the opinion that the board’s decision of boosting dividend reflects the company’s sound fundamentals, even amidst sluggish revenue growth resulting from fuel and food inflation.  

However, retail inflation is rapidly gaining momentum and Safeway may find it difficult to pass on increased prices to its customers due to stiff competition. This tough scenario has resulted in certain consumers trading down to a less-expensive mix of products or searching for discounts on grocery items, which in turn have impacted Safeway’s sales.

The company expects these difficult economic conditions to continue for some time. The company confronts a wide spectrum of competitive threats, especially from players like SUPERVALU Inc (NYSE:SVU), The Kroger Co (NYSE:KR) and Wal-Mart Stores (NYSE:WMT). Safeway currently retains a Zacks #3 Rank (short-term Hold rating). Over the long term, we are Neutral on the stock.

 
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