Major grocery chain Safeway Inc. (SWY) recently announced a regular quarterly dividend of 14.5 cents payable on April 12, 2012 to shareholders of record as of March 22, 2012. The Board of Directors of the company also approved an additional $1.0 billion for the company's existing stock repurchase program with just $400 million remaining as of February 22, 2012.
In the fourth quarter of fiscal 2011, Safeway repurchased 43.3 million shares for $858.6 million (76.1 million shares for $1.6 billion during the year) and was left with $0.9 billion under its existing stock repurchase program at the fiscal end. Safeway's stock repurchase authorization does not have an expiration date.
Despite the current volatile macro environment, Safeway possesses high earnings visibility, consistent cash generation ability, disciplined investment and limited balance sheet risk. At the end of December 2011, the company had $729.4 million in cash and cash equivalents compared with $778.8 million at the end of 2010.
Free cash flow for the year declined to $751.4 million from $1.06 billion as capital expenditures increased by $256 million coupled with an increase in inventories. In 2012, Safeway expects around $900 million in capital expenditure with free cash flow in the range of $850–$950 million.
Debt balance increased to $5.4 billion at the end of 2011 as against the year-ago figure of $4.8 billion. The increase in debt level was used to finance a part of the company’s share repurchases. The debt to total capital remains at 59.3% (49.0% in 2010). In this period, the company opened 25 new Lifestyle stores, completed remodeling of 29 Lifestyle stores and closed 41 stores.
With the Lifestyle transformation program almost nearing completion, we believe Safeway’s capital expenditure will decline going ahead. We expect Safeway’s cash position to improve further, thus enabling the company to pay dividends, repurchase shares and reduce its debt.
We are also of the opinion that the Board’s decision of paying a dividend and increasing share repurchase authorization reflects the company’s sound fundamentals even amidst sluggish revenue growth, resulting from fuel and food inflation. It will also help drive bottom-line growth going forward.
However, retail inflation is rapidly gaining momentum and Safeway may find it difficult to pass on increased prices to its customers due to stiff competition. This tough scenario has lresulted in certain consumers trading down a less expensive mix of products or searching for discounts on grocery items, which in turn have impacted Safeway's sales.
The company expects these difficult economic conditions to continue for some time. The company confronts a wide spectrum of competitive threats, especially from players like SUPERVALU Inc (SVU), The Kroger Co (KR) and Wal-Mart Stores (WMT).
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