I know several people that work for Safeway at various levels. So I was naturally curious to discover Safeway’s dividend record, earning power, and strength of balance sheet. I didn’t even know they paid a dividend until yesterday.
Safeway (SWY)
Share price: $19.00
Shares: 339.9 million
Market capitalization: $6.46 billion
Bonds outstanding: $5.3 billion
Safeway is one of the largest food and drug retailers in North America. The company operates stores in California, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area, the Mid-Atlantic region, British Columbia, Alberta, and Manitoba. Safeway has a 49% ownership interest in Casa Ley, which operates food and general merchandise stores in Mexico. The company also owns a third-party gift card provider, Blackhawk.
DIVIDEND RECORD
Safeway has been a consistent dividend grower since 2005. The company paid no dividend prior to 2005.
Dividend: $0.145 per quarter
Dividend yield: 3.05% (this is a decent dividend yield, but it is not a high dividend stock)
Dividend payout ratio: 34% ($0.58 DIV/$1.70 EPS)
EARNING POWER $1.37 per share @ 339.9 million shares
EPS Net inc. Shares Adj. EPS
2006 $1.94 $870.6 M 447.8 M $2.56
2007 $1.99 $888.4 M 445.7 M $2.61
2008 $2.21 $965.3 M 436.3 M $2.84
2009 ($2.66) ($1,097.5 M) 436.3 M ($3.22)
2010 $1.55 $589.8 M 379.6 M $1.74
2011E $1.70* $577.8 M 339.9 M $1.70
*mean earnings estimate according to Wall Street valuations on Morningstar.com
I think Wall Street analysts have overestimated Safeway’s ability to earn $1.70. They’re 75% through the fiscal year, but they have only earned 51% of the analyst’s estimates. I don’t think the company will earn another $0.82 in the fourth quarter of 2011.
Results from the first three quarters of 2011:
1Q $0.07 $25.1 M 339.9 M $0.07
2Q $0.41 $145.8 M 339.9 M $0.43
3Q $0.38 $130.2 M 339.9 M $0.38
Total $0.86 $301.1 M 339.9 M $0.88
Six year average adjusted earnings per share is $1.37.
Consider a contrarian buy below $10.96 (8x average adjusted earnings)
Consider a value buy below $16.44 (12x average adjusted earnings)
Consider speculative selling above $27.40 (20x average adjusted earnings)
Safeway is currently trading at 13.8 times average adjusted earnings.
BALANCE SHEET
Assets and shareholder equity are trending slightly down. That isn’t good. Safeway does not possess a strong balance sheet.
Book value per share: $12.79
Price to book value ratio: 1.48 (this is good)
Current ratio: 0.87 (over 2.0 is good)
Quick ratio: 0.16 (over 1.0 is good) Safeway has very little cash to cover current liabilities.
CONCLUSION
Safeway is not safe at $19.00 per share. Its falling earnings this year and the horrible US economy will hurt the price of Safeway’s shares. However, Safeway is a buy when its price is below $16.44. Its mediocre dividend yield is bolstered by its growth pattern. I need to investigate more to determine why its balance sheet is shrinking. The Balance sheet is average right now.
DISCLOSURE I don’t own any positions in Safeway (SWY).
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