Recent Buy - Rollover IRA (1)

Back in March I decided to largely forgo the options trading strategy that I had been employing in my Rollover IRA.  It's not that it wasn't profitable, rather it was a decision based more on efficiency and effort.  When I was actively trading options, primarily around dividend growth stocks, I was constantly having to look for new ideas and manage existing positions and frankly it just took a lot of time.


Contrast that with the core dividend growth investing approach which is some combination of buy, hold, collect, reinvest and monitor once a quarter, semi-annually or annually.  That's much less of a time commitment and frees up a lot of mental energy.

As such I've backed off on my options trading and have converted a good portion of the portfolio as more of a "classic" dividend growth portfolio.  I also began reporting my dividends for the portfolio since it's adopted the same approach, for the most part, of my FI Portfolio.  That doesn't mean I won't trade options, but the pace and intensity is backed way down.

On Monday of this week I decided to make a new purchase for my Rollover IRA.  On the heels of my recent dividend stock analysis on The Kroger Co (KR), which can be read over at Seeking Alpha, I felt the valuation was pretty compelling and jumped in.

I purchased 150 shares of Kroger $21.50 per share.  The total cost basis, including commissions, for this lot came to $3,229.95 or $21.53 per share.

Kroger is a Dividend Contender with 14 consecutive years of dividend growth.  Based on the current quarterly payout of $0.16 per share my investment in Kroger will provide $96.00 in dividends over the next year and carries a YOC of 2.97%.  
  



Due to this purchase my Rollover IRA's forward 12-month dividends increased to $1,985.34 .

Dividends

As a dividend growth investor any potential investment must Jerry Maguire me, i.e. "SHOW ME THE MONEEEEEEYYYY!!!!".  I judge that based on a company's history of both paying and growing dividends to shareholders.  Since 2006 Kroger has definitely been a solid dividend growth investment.
 

*A full screen version can be found here.

Kroger doesn't have the lengthiest dividend growth streak around; however, what they lack in length they've made up for in pace.  When the "worst" year over year growth rate comes in at 5.8% I think you'd be hard pressed to voice any real complaints.  Even better is that every one of the 9 rolling 5-year growth rates is at 11% or greater. 

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 2006 can be found in the chart below.  

*A full screen version can be found here.

Valuation

One valuation method that I like to use is dividend yield theory.  The idea behind dividend yield theory is that large, stable companies will see their dividend yields revert to their mean over time.  So when the yield is higher than "average", shares are undervalued and when it's lower than "average", shares are overvalued.

*A full screen version of this chart can be found here.

Dating back to 2006 when Kroger initiated their dividend shares have routinely offered dividend yields in the 1-2% range.  The yield at my purchase price, 2.97%, is significantly above the longer term trend and the 5 year moving average of 1.60%.  Based on dividend yield theory shares of Kroger are fairly valued with a yield of 1.6% or ~$40 per share suggesting nearly 100% upside.  

I personally don't think we'll see a return to a "normal" dividend yield in the 1.6% range for Kroger; however, I do think 2-2.5% could be the new normal.  That would put the current fair value of shares between $25 to $32 implying 19% to 49% upside potential.

As another quick valuation check, Kroger's 5 year average P/E ratio is 15.6x and shares are currently trading around 10x FY 2020's earnings estimates and just 9.3x FY 2021's estimates.  That's a pretty significant discount to the average.

Shares appear to be significantly undervalued with market participants being overly bearish on a business that won't be going anywhere anytime soon.  People still need to eat every day and Kroger's large footprint and store count should allow them to continue to capitalize.  

Conclusion

I'm not a big fan of the business itself because it relies entirely on volume rather than margins which leaves the business more susceptible to changes in consumer preferences.  That being said I don't think that Kroger is going anywhere and that shares are just too cheap to ignore here.  


I consider this investment more of a value play rather than a core, buy and hold DGI stock.  As such my plan is to sell at least part, if not all, of my position once I feel that shares are close to fairly valued or over valued.  

I've started compiling the dividend history, growth rates and dividend yield theory for many dividend growth companies.  The Kroger Co.'s can be found here and the remaining companies that I've already gathered the data on can be found here.  As new companies are added the list will be updated.

What do you think of my purchase of The Kroger Co.?  Do you think shares are undervalued here around $20?