Kroger’s Merger Plans with Albertsons Blocked, Sparks Stock Divergence
Kroger’s KR intended purchase of Albertsons ACI was halted this week after federal judges confirmed that the merger would violate consumer protection laws and lessen competition.
After over two years of examination, Albertsons dissolved the merger agreement and initiated a legal action against Kroger for $600 million in termination fees.
Kroger at Peaks; Albertsons at Lows
Reflecting on Albertsons’ challenges, ACI shares are nearing their 52-week low of $17, contrasting greatly with the proposed buyout price of $34.10 per share or a total of $24.6 billion. In comparison, Kroger’s stock has reached a 52-week high of $63.
Investor sentiment favors Kroger, which holds a stronger market position, while Albertsons appears more vulnerable following the failed deal. Kroger’s stock has surged nearly +40% year to date, outperforming the S&P 500’s +28%, while Albertsons’ shares have plummeted by -18%.
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Capital Strategies: Buybacks and Dividends
Looking ahead, Kroger is determined to lower grocery prices after previously committing $1 billion to do so if the acquisition was completed. Furthermore, Kroger plans to repurchase $7.5 billion of its common stock after pausing its buyback initiative during acquisition considerations.
In a similar move, Albertsons has allocated $2 billion to a share repurchase program and will boost its quarterly dividend by 25%, raising it from $0.12 to $0.15 per share.
Currently, Albertsons’ annual dividend yield of 2.63% surpasses the S&P 500’s average of 1.18% and slightly exceeds Kroger’s 2.09% yield.
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Comparing Future Outlooks for ACI and KR
According to Zacks estimates, Albertsons’ total sales are anticipated to rise over 1% for fiscal 2025, with projections of nearly 2% growth in FY26 to $82.04 billion.
Nonetheless, annual earnings are expected to decline by -21% in FY25, dropping to $2.26 per share from $2.88 in FY24. While FY26 estimates indicate a modest recovery with a 2% rise in EPS, it’s notable that earnings revisions have decreased significantly in the past two months.
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Kroger is expected to see total sales contract by over -1% in FY25 but predicts a growth of 1% in FY26, reaching $149.68 billion. Following a record performance in annual earnings, Kroger’s EPS is projected to decrease by -7% in FY25, but is expected to rise by 5% in FY26 to $4.66.
Notably, EPS revisions for FY25 have remained stable for the past two months, while estimates for FY26 show slight improvements.
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Valuation Metrics: ACI vs. KR
Interestingly, both Albertsons and Kroger are valued at forward P/E ratios of 8X and 13.8X respectively. They both trade at under 1X sales, indicating significant discounts compared to industry standards.
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Conclusion
Despite a lower P/E valuation and a more attractive dividend, Albertsons currently holds a Zacks Rank of #4 (Sell) while Kroger stands at #3 (Hold). Given Kroger’s dominant market position, long-term investors may find value at this level, while declining earnings estimates suggest potential challenges for Albertsons stock.
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The Kroger Co. (KR): Free Stock Analysis Report
Albertsons Companies, Inc. (ACI): Free Stock Analysis Report
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
