Ticker: KR Buy below $25.
Why I Would Buy
1. Cheap– Kroger trades at about 13x trailing earnings and 11x forward earnings.
2. High RoE – Regular readers know that returns-on-equity is my favorite metric for picking stocks; Kroger has maintained double digit annual returns-on-equity during the past decade.
3. Low Payout Ratio – Kroger pays about 2% dividend, but the payout is only about 20% of earnings.
4. High Ratings –Both Morningstar and S&P rate the stock at 4 out of 5 stars.
What Could Go Wrong
1. Highly Leveraged –Kroger has a large degree of indebtedness, more than that of its peers and more than I am comfortable with. Greater than 65% of the company’s capital structure is debt.
2. Low Credit Rating –This is related to the point above. Kroger has credit rating that is barely investment grade (Moody’s Baa1).
Disclosure: I am long KR, please read additional disclosures here before taking any action based on this post.