Berkshire Hathaway CEO Greg Abel has trimmed several smaller consumer holdings this year but kept the firm's stake in Kroger, and of the conglomerate's three remaining consumer staples names, analyst James Brumley says Kroger is the one he would buy first. The grocer's stock has pulled back 20% from its March peak even though its full-year profit and cash flow guidance hasn't changed.
Picking up where Warren Buffett left off, Berkshire Hathaway CEO Greg Abel is keeping the conglomerate invested in several of its existing consumer staples trades, including a $34 billion stake in Coca-Cola, Berkshire's fourth-biggest position. Kraft Heinz is the second name, though Buffett himself has lamented that struggling holding. The third, often-overlooked trade is grocery chain Kroger, and Brumley argues it's the one worth buying right now.
Why the stock pulled back
Coca-Cola has climbed 60% from its late October low, making it pricier, while Kraft Heinz remains distracted by its plan to split into smaller pieces. Kroger, meanwhile, has fallen from March's peak after new CEO Greg Foran, who took over in February, began cutting prices to compete with Walmart and Aldi.
The move dented results. Kroger's fiscal second-quarter same-store sales growth came in at just 0.25%, down from 3.4% a year earlier, leaving revenue short of estimates. Gross margins also slipped 10 basis points year over year. The company lowered its full-year sales guidance in last month's report, though investors had started pricing in the headwind as early as April.
Guidance that didn't move
Despite the softer sales outlook, Kroger's full-year guidance for operating profit, free cash flow, and per-share earnings wasn't changed when the same-store sales forecast was cut. In retrospect, the sellers may have overshot their target.
Dividend and buybacks underpin the case
The 20% drop from March's high has pushed Kroger's forward dividend yield to 2.6%. It's built on a quarterly dividend raised for 20 consecutive years, including an 11% increase most recently. That payout has more than tripled over the past decade, aided by generous stock buybacks that have cut Kroger's share count by roughly a third since 2016, with no sign of the streak ending.
Abel stuck with Kroger even as he exited smaller consumer names like Domino's and Constellation Brands earlier this year. That alone, Brumley argues, makes Kroger Berkshire's most interesting consumer staples bet right now.
Source: The Motley Fool
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