Tuesday, December 14, 2010

A Risky Dividend Play With Potential

The grocery industry is a competitive marketplace. Margins are tight, pricing power is virtually non existent and the difference between success and failure is razor thin. The dog of this industry over the past few years has been Supervalu (SVU).

Supervalu is a discount grocery chain that owns and operates a number of different discount chains. Supervalu owns the following brands: Albertson's, Save-A-Lot, Shoppers, Shop n Save, Acme, Bristol Farm, Farm Fresh, Hornbacher’s, Jewel, Osco, Sav-On, Shaw’s, Bigg’s, Star Markets, Cub,and Lucky. The company owns over 2400 stores nationwide including Albertson’s.

The stock has been in the doldrums for awhile now due to its high debt load. The  company has a 7 billion dollar debt burden, The company acquired much of this debt when Supervalutook acquired Albertson’s. The company has been doing a good job of lowering its debt level. It was over $9 billion dollars last year.The debt may be a problem but the company generates significant free cash flow to cover its interest payments. This year Supervalu has created $1.4 billion in free cash flow.

At just $8 a share, Supervalu is a very risky stock but has growth opportunity. The company has a dividend  which is currently yielding 4%. Earnings have been depressed for sometime now declining 23% this year and the stock carries enormous risk. Investors attracted to the high yield should be aware that this could be slashed at any time as the company may need to conserve cash.

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