Kroger: A Dividend Dynamo in a Retail Landscape of Contrasts

The retail sector faces relentless headwinds—online disruption, inflation, and shifting consumer preferences—yet some companies remain pillars of consistency. Among them, The Kroger Co. (KR) stands out for its 19-year dividend growth streak, robust free cash flow (FCF), and a valuation that appears undervalued relative to peers like Costco (COST), Lowe's (LOW), and Target (TGT). For income investors, Kroger offers a compelling mix of reliability and potential upside, even as the broader sector grapples with uncertainty.

Kroger's Dividend Discipline: A Decade-Long Testament to Stability

Since reinstating its dividend in 2006, Kroger has increased its payout every year, a streak that will extend to 19 consecutive years by its next dividend payment in September 2025. The compounded annual growth rate (CAGR) of its dividend stands at 13%, a remarkable figure given the turbulence in retail. Even in 2025, Kroger raised its quarterly dividend by 9%, to $0.35 per share, reflecting its confidence in cash flow generation.

This consistency is underpinned by Kroger's free cash flow, which it projects to remain between $2.8 billion and $3.0 billion in fiscal 2025. This FCF not only supports dividend growth but also provides flexibility for share buybacks and strategic investments. A critical metric: Kroger's dividend cover ratio of 3.7—its earnings per share (EPS) relative to dividends—suggests ample room for further increases.

Valuation: Kroger's Undiscovered Gem in a Pricy Retail Landscape

While peers like Costco and Target command rich valuations, Kroger trades at a price-to-sales (P/S) ratio of 0.31x, far below the industry average of 1.06x. Compare this to Costco's P/S of 1.70x (as of June 2025) or Target's 0.5x, and the discount becomes stark.

This undervaluation persists despite Kroger's strong operational execution. For instance:
- E-commerce sales rose 15% in Q1 2025, a key growth lever.
- Identical sales (excluding fuel) increased 3.2%, outpacing expectations.
- Kroger's adjusted FIFO operating profit grew to $1.52 billion in Q1 2025, up from $1.50 billion a year earlier.

The disconnect between performance and valuation may stem from near-term challenges, such as store closures and pension liabilities. However, the low P/S ratio suggests the market is underappreciating Kroger's long-term moat—its scale, omnichannel capabilities, and dividend resilience.

Peer Comparison: Kroger's Advantages and Weaknesses

Costco (COST): The Growth Machine

Costco's dividend growth has been strong (a recent 12% increase), but its P/S ratio reflects premium pricing. While its FCF remains robust ($6.0 billion in Q2 2025), Kroger's dividend yield (currently ~1.5%) is more income-focused than Costco's ~0.5%.

Lowe's (LOW): Cash Flow Strength, But Valuation Questions

Lowe's has a 25-year dividend growth streak and generates strong FCF ($7.7 billion in FY2025). However, its Price-to-FCF ratio of 18.57x (vs Kroger's ~12x) and exposure to housing market volatility make it riskier in a slowing economy.

Target (TGT): The Dividend Titan with a Yield Drag

Target's 54-year dividend streak is legendary, but its P/S ratio of 0.5x still exceeds Kroger's. While its balance sheet is strong, Target's stock has underperformed Costco and Kroger in 2025, reflecting concerns about its omnichannel execution.

Risks: Can Kroger Sustain Its Streak?

• Economic Sensitivity: Kroger's reliance on consumer discretionary spending leaves it vulnerable to recessionary pressures.
• Competitive Pressures: Amazon, Walmart, and even dollar-store chains are eroding traditional grocers' margins.
• Debt Management: Kroger's leverage ratio (net debt to EBITDA ~2.5x) is manageable but could constrain flexibility if FCF dips.
• Valuation Realities: The P/S discount may already reflect these risks, limiting upside.

Investment Thesis: A Defensive Play with Income Upside

For income-focused investors, Kroger offers an attractive entry point at its current valuation. Its dividend growth streak, supported by FCF, positions it as a safer bet than peers like Target or Lowe's, which face sector-specific headwinds. The low P/S ratio provides a margin of safety, even if near-term growth is modest.

However, this is not a high-beta growth story. Investors should:
1. Monitor Kroger's FCF trends closely; a drop below $2.8 billion could pressure the dividend.
2. Watch for share repurchases, which could boost EPS and valuation multiples.
3. Consider dollar-cost averaging, given the retail sector's volatility.

Final Take: Kroger as a Contrarian Income Pick

In a retail sector where growth is uneven and valuations are stretched, Kroger stands out as an undervalued dividend stalwart. Its 19-year streak, robust FCF, and low P/S ratio make it a rare defensive play with income appeal. While risks are present, the reward-to-risk ratio tilts favorably for long-term investors willing to look past near-term retail industry noise.

For those seeking steady returns in a choppy market, Kroger remains a compelling choice—a dividend dynamo in a landscape of contrasts.

Disclosure: This analysis is for informational purposes only and does not constitute investment advice. Always conduct your own research or consult a financial advisor before making investment decisions.