Kroger’s (NYSE: KR) long-anticipated merger with Albertsons Companies (NYSE: ACI) has been a deadweight on their stock price for years. Try as they might; they just can’t get approval, and the stock prices are wallowing within trading ranges.

The deal, blocked by the FTC, would unlock value for both companies, but it will not be a game-ender for this retail stock if it never closes. 

The takeaway for investors is that low-beta Kroger performs well enough, grows, and pays a healthy dividend supported by the balance sheet. The balance sheet is the critical detail. Already strong, Kroger has been improving it for the last two years in preparation for the merger. This means that it is more than capable of acquiring ACI without hurting its outlook. If Kroger doesn’t close the deal, then the company is set up with a fortress balance sheet and robust cash pile to reinvest in store count, market penetration, dividend increases, and share repurchases. 

Kroger Pops On Solid Results, Reaffirmed Guidance

Kroger had a decent quarter with revenue of $45.3 billion, growing 0.3% and exceeding expectations for a modest decline. Sales ex-fuel are up a stronger 0.6%, offset by lower realized gas prices. Comp-store sales ex-fuel are up 0.5%, led by digital. Digital sales, a pillar of the company’s growth strategy, improved by 8% across the network, with double-digit gains in delivery and pickup.

The margin news is mixed. Margin contracted, but mitigating factors include business investment and better-than-forecast results. The takeaway is that Kroger continues to generate strong cash flow and free cash flow sufficient to improve the balance sheet while paying dividends. The critical details include $0.06 or 425 basis points of bottom-line outperformance, an 8% increase in cash and equivalents, assets up, debt down, liabilities down, and a 15% increase in equity. 

The guidance could be more robust but was at least reaffirmed. The company forecasts revenue and earnings to grow modestly by year’s end and for EPS to bracket the consensus. This is not a catalyst for higher prices but aligns with the forecasts leading the market. Analysts' activity leading into the report includes an upgrade to Outperform by BMO and an increased price target from Telsey. These updates forecast a stock price of $60 to $62, implying a 15% to 20% gain for this market. As it is, the consensus estimate of $56 trends higher in 2024, offers a 7.5% upside, and it is being defended by analysts following the release. 

Kroger Has Everything Income Investors Could Want

Kroger has what income investors are looking for, including an outlook for sustained growth over the long term, value relative to the S&P 500, a higher-than-average yield, a low beta, and the ability to repurchase shares. The only factor that needs to be in play today is repurchases, which have been halted to preserve capital, build cash, and strengthen the balance sheet. In this light, assuming the merger with Albertsons fails to close, the company is set up to immediately resume repurchases, issue a dividend increase or special dividend, and go hunting for acquisitions. 

The technical action in KR is mixed. The market surged following the release, moved up strongly, and fell back under the weight of sellers, suggesting significant resistance at critical levels. Resistance to higher prices could keep the market range bound until later in the year, and there is a risk of a deeper sell-off.

In this scenario, the stock price could fall to the low end of the range but is unlikely to set a lower low. The $44 level has been firm support for nearly three years and is unlikely to fail now. Assuming the merger process continues to drag on, the likely outcome is that value investors and institutions will support the stock at this level and send it rebounding back to the top of the range. The resolution of the merger process would be a catalyst for higher share prices, either way it goes.