Is The Kroger Co. (KR) Superior to Costco Wholesale Corporation (COST) and Wal-Mart Stores, Inc. (WMT)?

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The Kroger Co. (NYSE:KR) reported as fairly solid quarter. The company is known for selling food products and operating grocery chains like Fry’s. This is one of the best defensive stocks to own in market volatility. For all of you bond investors who are looking for a safe haven, this is the company for you.

The Kroger Co. (NYSE:KR)

Earnings highlight

The company reported a 3.4% growth rate in year-over-year revenue for the second quarter of 2013. The growth in sales was driven by its grocery operations as the growth rate excluding fuel was 3.8%. The management team was pretty optimistic, as the company was able to grow its earnings from $0.78 to $0.92, an 18% improvement year-over-year.

The significant growth in earnings was driven by improving the operating profit margin from 2.8% to 2.9%. In the world of groceries, a 10-basis point improvement in margins is an event where both the analysts and the management team get up and start dancing. Grocers have razor-thin profits, I mean they are so thin that they would make an iPhone look fat. A small improvement in margins goes a long way.

That being the case, the company came out with a 1.6% profit margin for the quarter, which was better than the 1.5% profit margin that it reported in the same period a year ago.

The company raised its guidance by $0.01 to $0.02 for the full year. It believes that it can continue a long-term growth rate of 8 to 11%, and as such will continue to increase the size of its dividends going forward.

Investment opportunity

This is the type of investment that would appeal to low-risk investors. The company operates 3,600 supermarkets, convenience stores, fine jewelry stores, and similar retail outlets. Its primary business of selling groceries is pretty resistant to cyclical recessions. The company has an every-day-low-pricing strategy that seems to be working effectively and is moving away from the coupon business.

With an 8 to 11% long-term growth rate on earnings and a 1.82% dividend yield, the company is a compelling investment opportunity. The company’s stock currently trades at a 12.2 earnings multiple, which is reasonable based on its projected growth.

The Kroger Co. (NYSE:KR) has grown its dividends by 12.05% on average over the past five years. With the management team planning to continue growing dividends, you have a fairly solid investment opportunity here.

Other investment opportunities

Wal-Mart Stores, Inc. (NYSE:WMT) is a great company. I tend to like this company a lot because it’s similar to Fry’s. Wal-Mart Stores, Inc. (NYSE:WMT) has consistently grown its profit margins over the past ten years. The company has also been able to grow earnings even through periods of economic contraction. It seems like a stable growth investment based on its share buy-back program, growth in its store footprint, and same-store-sales growth in both Wal-Mart and Sam’s Club stores.

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