Is Safeway (SWY) safe at $19.00 per share?

DIVIDEND RECORD

Safeway has been a consistent dividend grower since 2005.  The company paid no dividend prior to 2005.

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Dividend: $0.145 per quarter

Dividend yield: 3.05% (this is a decent dividend yield, but it is not a high dividend stock)

Dividend payout ratio:  34%  ($0.58 DIV/$1.70 EPS)

EARNING POWER  $1.37 per share @ 339.9 million shares

            EPS                   Net inc.             Shares               Adj. EPS

2006     $1.94                $870.6 M           447.8 M             $2.56

2007     $1.99                $888.4 M           445.7 M             $2.61

2008     $2.21                $965.3 M           436.3 M             $2.84

2009     ($2.66)             ($1,097.5 M)     436.3 M             ($3.22)

2010     $1.55                $589.8 M           379.6 M             $1.74

2011E    $1.70*              $577.8 M           339.9 M             $1.70

*mean earnings estimate according to Wall Street valuations on Morningstar.com

I think Wall Street analysts have overestimated Safeway’s ability to earn $1.70.  They’re 75% through the fiscal year, but they have only earned 51% of the analyst’s estimates.  I don’t think the company will earn another $0.82 in the fourth quarter of 2011.

Results from the first three quarters of 2011:

1Q        $0.07                $25.1 M             339.9 M             $0.07

2Q        $0.41                $145.8 M           339.9 M             $0.43

3Q        $0.38                $130.2 M           339.9 M             $0.38

Total     $0.86                $301.1 M           339.9 M             $0.88

Six year average adjusted earnings per share is $1.37.

Consider a contrarian buy below $10.96 (8x average adjusted earnings)

Consider a value buy below $16.44 (12x average adjusted earnings)

Consider speculative selling above $27.40 (20x average adjusted earnings)

Safeway is currently trading at 13.8 times average adjusted earnings.

BALANCE SHEET

Assets and shareholder equity are trending slightly down.  That isn’t good.  Safeway does not possess a strong balance sheet.

Image008

Book value per share: $12.79

Price to book value ratio: 1.48  (this is good)

Current ratio: 0.87 (over 2.0 is good)

Quick ratio: 0.16 (over 1.0 is good)  Safeway has very little cash to cover current liabilities.

CONCLUSION

Safeway is not safe at $19.00 per share.  Its falling earnings this year and the horrible US economy will hurt the price of Safeway’s shares.  However, Safeway is a buy when its price is below $16.44.  Its mediocre dividend yield is bolstered by its growth pattern.  I need to investigate more to determine why its balance sheet is shrinking.  The Balance sheet is average right now.

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DISCLOSURE  I don’t own any positions in Safeway (SWY).

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Published in: on November 3, 2011 at 12:23 am  Leave a Comment  

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