Is Safeway Inc. (SWY) a Value Trap?

Wal-Mart and American Express Company (NYSE:AXP) have created an alternative to traditional banking, and are doing it cheaper. They are also recruiting and capturing many customers who were previously “un-banked.”

As of January, Bluebird boasted 575,000 account holders and $275 million in funds loaded onto the cards. The company also confirmed that 85% of these customers were new to American Express, with about 45% of them being under the age of 35.

American Express will likely gain some nice revenue from interchange fees– which are assessed on a merchant (in this case Wal-Mart) every time a Bluebird card is swiped. American Express Company (NYSE:AXP) also gains access to a huge new customer base, while Wal-Mart gains from the increase in foot traffic and shoppers.

Wal-Mart expanding in groceries

Wal-Mart launched its first Neighborhood Market stores back in 1998, and has since continued to aggressively expand these locations. These stores are designed to be smaller than the company’s gigantic Supercenters, and offer a full line of groceries. These smaller Wal-Mart Neighborhood Markets are like grocery stores– a direct threat to the likes of Safeway.

Safeway Inc. (NYSE:SWY) faces many threats in a crowded industry that is also being expanded by the dominant Wal-Mart, so the company will need to remain as competitive as ever. Programs such as Fast Forward should help, but the threat of Wal-Mart will continue to linger.

While groceries were only about 10% of Wal-Mart’s net sales a decade ago, as of last year, groceries accounted for about 55%, which is around $244 billion in net sales. The company is pushing groceries in a big way.

The bottom line

Safeway, even amongst increased competition, offers a lot of value at its current levels. The company offers a great income-generating dividend that yields over 3% from a very low payout ratio. While the company carries more debt than it probably should, the company’s new CEO knows it and has opted to do something about it.

The company has also managed to increase its earnings, and this is a very encouraging sign for Safeway– especially if the company stays focused on cleaning up its balance sheet. Safeway Inc. (NYSE:SWY) looks like a good domestic play at only around 9 times earnings, but should also be monitored to make sure that its earnings quality remains intact and its debt levels remain in check.

If earnings sink and remain stagnant, Safeway could easily fall into “value trap” territory. As of now, however, the company looks like a good buy at current levels and has positive fundamentals going forward.

The article Is Safeway a Value Trap? originally appeared on and is written by Joseph Harry.

Joseph Harry owns shares of Wal-Mart Stores. The Motley Fool recommends American Express. Joseph is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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