Albertsons jacks up dividend as stock soars since failed merger

Key points

• Albertsons stock is up some 13% over the past month.

• It raised its dividend for the first time since 2021.

• Is Albertsons stock a buy after failed merger with Kroger?

The mega deal with grocery store chain Kroger fell apart in December.

Since its failed mega merger with grocery store chain rival Kroger (NYSE: KR), Albertsons (NYSE: ACI) stock has been on a tear.

Albertsons stock has jumped about 13% since it merger agreement with Kroger fell apart on December 11. The grocery store chain also raised its quarterly dividend for the first time in four years, rewarding shareholders as it heads into a better macro-environment.

It has been a difficult past few years for grocery stores, hurt by high inflation and supply chain disruptions. But with lower inflation and investments in improving its supply chain, Albertsons beaten down stock is poised for a turnaround.

Albertsons sues Kroger

The long-planned merger between the nation’s two leading grocery store chains, not including big box stores, would have created a behemoth that would rival Walmart as the largest grocer. The Federal Trade Commission acknowledged that, which is why it moved to block the merger in December. The FTC filed a preliminary injunction to stop the $24.6 billion deal, saying it would be bad for consumers by taking a major competitor off the market.

The next day, Albertsons terminated its merger agreement. CEO Vivek Sankaran said that in light of the FTC’s action, “we have made the difficult decision to terminate the merger agreement. We are deeply disappointed in the courts’ decisions.”

But then the company turned around and sued Kroger for breach of the merger agreement alleging that Kroger adopted a “willfully deficient approach to securing regulatory clearance.”

“Rather than fulfill its contractual obligations to ensure that the merger succeeded, Kroger acted in its own financial self-interest, repeatedly providing insufficient divestiture proposals that ignored regulators’ concerns,” Tom Moriarty, Albertsons’ general counsel and chief policy officer, said. “Kroger’s self-serving conduct, taken at the expense of Albertsons and the agreed transaction, has harmed Albertsons’ shareholders, associates and consumers.” 

Albertsons is seeking “billions of dollars in damages” from Kroger, along with a $600 million termination fee. Some media outlets have put the damages sought at $6 billion. Kroger officials called Albertsons claims “baseless and without merit.”

First dividend raise in four years

While Albertsons officials were disappointed the deal fell apart, shareholders were not. Albertsons stock price has risen some 13% since then, while Kroger stock has dropped 6%.

It seems that some of the capital earmarked for the merger went to shareholders, as Albertsons raised its quarterly dividend for the first time since 2021, bumping it up 25% to 15 cents per share at a high yield of 3.01%. It also initiated a $2 billion share buyback program to repurchase company stock.

In addition, Albertsons will focus its resources on its Customer for Life program, which seeks to put the customer at the center of everything it does to build loyalty. The program seeks to grow identical sales by at least 2% over time, grow adjusted EBITDA at higher than identical sales growth over time, spend $1.7 billion to $1.9 billion in capital expenditures annually, and increase quarterly dividends and share repurchases.

For the rest of its fiscal year, Albertsons anticipates 1.8% to 2.0% identical sales growth. The company also raised adjusted EBITDA and adjusted net income guidance for the full fiscal year and plans to spend $1.8 billion to $1.9 billion in capital expenditures.

Albertsons stock is cheap, with a P/E of 11 and a forward P/E of 9. It also has a median price target of $23 per share, which would be a 12% increase. It is unclear what, if anything, it will get from the lawsuit, but the improving macro environment, along with the commitment to the dividend and share repurchases, makes Albertsons a somewhat intriguing value stock.