Ahold Delhaize Stock: Market Dip, Strong Dividends, Digital Growth (OTCMKTS:ADRNY)

Koninklijke Ahold Delhaize N.V. (OTCQX:ADRNY), the ninth-largest supermarket chain globally by market capitalisation, has experienced a 13.89% decrease in stock value over the past six months. This decline was primarily triggered by a negative market response in Q3 2023, following the company’s report of margin weakness in its largest market, the United States. Consequently, the company anticipates delivering lower earnings than FY2022.

While these factors may cause concern, it’s crucial to consider the broader context. Since its successful merger in 2016, Ahold Delhaize has more than doubled its top and bottom lines. The company maintains a generous dividend program and has announced a share buyback program, signalling confidence in its financial health. Furthermore, with a forward price-to-earnings ratio of 10.84, Ahold Delhaize’s valuation is attractive, particularly when compared to its larger competitors.

The company’s dividend has a five-year growth rate of 8.57%, which is backed up by an upward trending positive levered free cash flow, currently standing at just over $3 billion TTM. With a strong presence in both supermarkets and e-commerce, the company has demonstrated resilience and adaptability in a highly competitive market environment. Therefore, despite recent challenges, long-term value investors may want to adopt a bullish stance on this stock

Company overview

Ahold Delhaize, a Dutch-Belgian multinational retail and wholesale holding company, was formed in July 2016 from the $28 billion merger of Ahold and Delhaize Group. Over the years, Ahold Delhaize has expanded its business format to include supermarkets, convenience stores, hypermarkets, online grocery, online non-food, drugstores, and liquor stores. As of 2022, its 21 local brands employ 414,000 people at 7,659 stores in 10 countries. The company’s TTM revenue was $94 billion, which has more than doubled since FY2015.

Its most recent acquisition was that of the Romanian grocery retailer, Profi Rom Food SRL (Profi), from MidEuropa, which was announced on October 30, 2023. This acquisition expanded Ahold Delhaize’s footprint in Romania and was valued at $1.3 billion.

While the company is making progress across many of its markets, its largest market, the USA, has been a concern due to a decline in margins and the impact it’s having on the company’s earnings potential.

In 2019, Ahold Delhaize planned to invest $480 million to bolster its U.S. supply chain with 26 facilities, aiming for completion by April 2024. However, a shift in strategy has occurred, reflecting the company’s adaptation to the growing trend of customers favoring online shopping, or ‘click and buy’, over traditional in-store shopping. The company is improving its operations and focusing on its omnichannel capabilities, such as an agreement to sell FreshDirect to Getir. By consolidating their operations and investing more in their digital and online capabilities, Ahold Delhaize is positioning itself to remain competitive in this new retail landscape.

Financial overview

Ahold Delhaize’s top line has more than doubled in the last eight years, with a current upward trend in revenue at $94.07 billion TTM, up from $93.14 billion in FY2022. Q3 2023 showed mixed results, with Group net sales of €21.9 billion, a 2.9% increase at constant exchange rates but a 2.1% decrease at actual rates. Comparable sales excluding gas rose by 3.1% for the Group, 0.9% in the U.S., and 7.0% in Europe. Online sales grew by 6.7%, but high operating costs led to a decline in gross margin.

It’s important to note that the net income TTM has seen a decrease compared to the previous year. This is primarily due to challenges in the U.S. market and a contraction in gross profit margin. However, a positive trajectory has been observed since the company’s merger, indicating potential for future growth.

Ahold Delhaize’s levered free cash flow has been on a positive trajectory, reaching a TTM value of $3.078 billion. This substantial sum provides the company with opportunities to reinvest in its operations, return capital to investors through share buybacks and dividends, and reduce its debt. Notably, Ahold Delhaize has launched a €1 billion share buyback program, with a target completion date set for the end of 2024.

Upon examining the balance sheet, it’s evident that the company holds a substantial cash reserve of $5.06 billion. Despite the current and quick ratios standing below one, at 0.75 and 0.41 respectively, there’s no significant cause for concern. This is largely due to the company’s robust generation of positive cash flow.

Valuation

Ahold Delhaize, despite a challenging period marked by a 14.74% decrease in stock value over the past six months and downgrades to a ‘Sell’ rating from analysts at JP Morgan and Goldman Sachs, still presents a compelling case for investors. These setbacks were triggered by the company’s weaker performance in the USA and a reduction in Q3 2023 earnings and EPS forecast. However, it’s crucial to look beyond these immediate challenges and consider Ahold Delhaize’s strategic initiatives and growth potential. The company is proactively investing in expansion through acquisitions and operational enhancements.

In comparison to its larger supermarket chain peers, Ahold Delhaize’s valuation appears attractive under several factors. The company’s forward-looking strategy, robust presence in Europe, and growing online sales could potentially counterbalance the current challenges.

The company’s FWD price-to-earnings ratio stands at 10.84, outperforming all competitors except for The Kroger (KR), which boasts a marginally lower ratio of 10.15. Furthermore, the company’s price-to-sales ratio is 0.31, implying that investors are paying less than a dollar for each dollar of revenue. This could suggest that the company is potentially undervalued, presenting a favourable opportunity for value investors to enter at a reduced price.

Ahold Delhaize is well-regarded for its generous dividends. Currently, its forward dividend yield stands at 3.58%, surpassing that of its major competitors. Over the past four years, the company has sustained an average dividend yield of 3.59%, demonstrating its consistent commitment to returning a substantial share of its profits to shareholders via dividends. This is a positive indicator for investors seeking regular income alongside capital growth.

Compared to its peers, Ahold Delhaize stands out as a potential investment due to its attractive valuation and high dividend yield.

Risks

Investors considering Ahold Delhaize should be aware of several risks. The company’s performance in the U.S., its main market, has been weaker recently, leading to a trimming of its 2023 earnings guidance. This has resulted in a significant drop in its share price. Additionally, the company’s Q3 2023 results showed a decrease in the underlying operating margin due to higher operating costs. Another risk is related to the company’s online sales growth, which, despite being robust, is dependent on the continuation of the online shopping trend. The company’s strategic acquisitions also pose a risk if they fail to deliver the expected growth or operational improvements. Lastly, any changes in the competitive landscape, regulatory environment, or macroeconomic conditions could also impact the company’s future performance.

Final thoughts

Despite facing challenges, particularly in the U.S., Ahold Delhaize has shown resilience and growth. Its investments in digital capabilities and strategic acquisitions indicate a commitment to adapt in the evolving retail landscape. The company’s attractive valuation and generous dividend program may offer long-term value to investors. Therefore, investors may want to take a bullish stance on this stock.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.