Ahold Delhaize: Still Keeping Up With U.S. Peers

seekingalpha08-26

Ahold Delhaize presented a decent set of numbers at the latest investor update.The new strategy, however, signals caution and a catalyst for stock price appreciation is missing.Shareholder returns ...

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href=https://seekingalpha.com/article/4717071-adrny-still-keeping-up-with-us-peers><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Ahold Delhaize presented a decent set of numbers at the latest investor update.The new strategy, however, signals caution and a catalyst for stock price appreciation is missing.Shareholder returns ...</p>\n\n<a href=\"https://seekingalpha.com/article/4717071-adrny-still-keeping-up-with-us-peers\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4559","symbol_name":"巴菲特持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4717071-adrny-still-keeping-up-with-us-peers","article_id":"2462716918","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458718371/image_458718371.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2462716918","pubTimestamp":1724678603,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Ahold Delhaize presented a decent set of numbers at the latest investor update.The new strategy, however, signals caution and a catalyst for stock price appreciation is missing.Shareholder returns dep","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4559":"巴菲特持仓","IE0034235188.USD":"PINEBRIDGE GLOBAL FOCUS 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appreciation is missing.Shareholder returns depend on modest dividend growth and consistent share buybacks, with potential risks including exchange rate effects and competition from discounters.While I would not lose any sleep expanding my position at the current price, I believe it is worthwhile waiting for another discount.100pk It's been more than a year since I covered Ahold Delhaize (OTCQX:ADRNY) in an article titled 'Wait For The Discount'. After publication, the stock gradually lost more than 15 percent, after which it rebounded. In spite of the rebound, total return severely lagged performance of e.g. the S&P500. In the meantime, the company distributed its dividend, maintained performance and drafted a new strategy. A strategy that does not contain a catalyst that will propel the stock to new highs. Therefore, I will gladly hold the stock until the next discount before adding to my position. Performance On August 7th, Ahold Delhaize presented another set of decent numbers, see figure 1. The IFRS reported numbers against actual (rather than constant) exchange rates showed better results, but as the underlying figures are used to determine the dividend pay-out ratio these have been presented. Figure 1 - 2Q24 results, 2Q24 investor update (aholddelhaize.com) All numbers rose, apart from the comparable sales growth in the US. Nevertheless, this year's outlook was confirmed, and it is expected the company will continue to do what is has done over the last five years; return €2Bn to shareholders through buybacks and dividend. Strategy update While this consistent return is welcome, inflation has also done its work over the last years, which effectively means total shareholder returns reduced on a relative basis. The name of the new strategy, Growing Together, fueled the hope to address this issue. To maintain growth, the new strategy consists of four pillars:  Investing in winning customer value propositions Densify and grow markets Innovate for growth and efficiency Leverage and lower cost base  The growth is required to support the financial targets, as given in figure 2. Figure 2 - 2025-2028 financial targets, Strategy Day 2024 (aholddelhaize.com) The 4% underlying operating margin (UOM) has been a goal for years and this remains the case for the foreseeable future. As this value remains constant, growth will have to come from an expansion of total sales and a reduction of the cost base. Both items are highlighted in the figure, but unfortunately little indication was given on the execution of these plans. The company has demonstrated the ability to grow sales, and the current target is essentially a continuation of the previous strategy. Regarding costs, the target of €5Bn in savings was accompanied by the statement of CFO Poots-Bijl to 'relentlessly leverage and lower cost base' during the strategy presentation. How this will be done was not clarified. Use of the word 'leverage' could be interpreted as a mean to lever the balance sheet and use the proceeds to pursue acquisitions, but again no clarity was given. Another use of leverage could be to bump shareholder returns, but this appears unlikely as it contradicts the intention to maintain annual share buybacks at a level of €1Bn. Finally, free cash flow (FCF) is intended to grow to a level of €9Bn, from a previous target of €8Bn. On an annual basis, this implies the targeted FCF rises from €2 to €2.25Bn. This is a conservative target given this number, on average, was already reached over the last two years. Moreover, the CFO said Ahold wants to return to net store growth in the US. Logically, it may be expected that opening new stores will eventually lead to a larger cash flow. Ratios While the cash flow target may be conservative, the €2.4Bn free cash flow level seen in 2023 is not likely to be repeated either, see figure 3. The main reason is that last years' FCF was supported by a significant reduction in working capital, especially due to changes in inventories, which means this can't be repeated to the same extent this year. Figure 3 - 2024 Targets, AR23 (aholddelhaize.com) There is, however, another reason why the FCF target set by management may be on the conservative side. Looking into Ahold Delhaize last year, it was noted the company did grow revenue, but the conversion of sales into cash flow was deteriorating, see figure 4. Figure 4 - Cash flow ratios (aholddelhaize.com; chart by author) At first glance, it seems the company found the way up again and conversion of sales into cash flow is in an uptrend again. However, based on the expectations shared by the management team, FCF will revert to the 2022 levels, which means the ratio will likely come down again in 2024. But that's not all. The FCF expectation for the coming years lies around €2.2-2.3Bn annually, implying the conversion ratio will reduce further under the assumption 4% annual sales growth can be achieved. To put this in perspective, if the company achieves the targeted sales growth, it will take three years to achieve €100Bn in sales (2023: €88.6Bn), leading to a 2.2 percent FCF to sales ratio. Shareholder returns As cash flow growth is tepid, the ability to grow dividends depends on the reduction in outstanding shares and the potential to increase the payout ratio. That said, the dividend can grow to €1.27 per share to remain within the upper bound of the payout ratio of 50%, assuming all else equal. If the annual increase in dividend per share remains constant at 5 cents, the company can continue business as usual and maintain the increases over the coming 3 years. Besides the ability to grow the dividend, cash is returned through annual share buybacks of €1Bn, although I mainly see this as a prerequisite to remain the pay-out ratio in check while growing the dividend. Even though the dividend appears safe, returns in terms of stock price appreciation have been limited, see figure 5. In spite of lagging major indices, most interesting is that the company lagged its Food Retail Peers in the last months of 2023. Figure 5 - Ahold Delhaize share price performance, AR23 (aholddelhaize.com) Regarding competition, the complete list of the selected peer group includes: Walmart (WMT), Kroger (KR), Tesco (OTCPK:TSCDY), Costco (COST), Carrefour (OTCPK:CRERF), Sainsbury (OTCQX:JSNSF), Target (TGT) and Albertsons (ACI). To assess the performance relative to these peers, figure 6 shows the normalized total return over the longest timespan available in YCharts. Note Albertsons has been omitted from the graph as insufficient data was available and Costco performed so well that it was excluded to aid legibility across the y-axis. Furthermore, total return is defined by YCharts as follows; the performance of a security inclusive of price appreciation, dividends/distributions and less the expense ratio. Figure 6 - Ahold Delhaize long term performance relative to selected peers (YCharts) Obviously, a different time frame would show other outcomes, but as a long-term dividend investor, I prefer this representation. Immediately it becomes clear that retailers with a presence in the US have outperformed their European counterparts. Of the companies shown, only ADRNY maintains presence in the US. Sainsbury's sold its subsidiary in America, Shaw's, to Albertsons in 2004, Tesco pulled out of the United States in 2013 and Carrefour expanded to the US in 1988 but ceased operations in 1993. While Ahold performs well, on average, it lags its US peers. This holds both for total return as for the PE ratio, see figure 7. While the valuation based on the price-to-earnings ratio is in line with peers Target and Kroger, there is a large gap with Walmart. On average, the PE ratio remained below the current level since 2018. Based on the historic data and the new (cautious) strategy, a higher multiple is not warranted, meaning the company will need to grow earnings consistently to prop up the stock price. Figure 7 - Ahold Delhaize PE ratio relative to selected peers (YCharts) My base case, however, is that the stock price has little upside and the dividend will grow modestly. The 2023 dividend was €1.10 giving a yield of 3.6 percent at the time of writing. As the interim dividend for the year 2024 was raised by 2 percent, the company remains on track to achieve a full-year dividend of €1.15, which would generate a forward dividend yield of 3.8 percent. Risks Although the company possesses the ability to grow the dividend, ultimately increasing cash flow is required to grow shareholder returns in a sustainable manner. Especially short term, this may prove a challenge. First of all, over the last years, results were supported by dollar tailwinds, as highlighted before. Currently, with the Federal Reserve expected to lower interest rates, the dollar may depreciate against the euro, implying results will be adversely affected. Next to potential exchange rate effects, comparable sales growth in the US has been mediocre since 3Q23, see figure 8. As about two thirds of revenue comes from the US market, growth has to be reignited to meet the required targets. Figure 8 - 2Q24 comparable sales growth, 2Q24 investor update (aholddelhaize.com) Against this backdrop, Ahold Delhaize itself has identified the competition from discounters as a critical subject where the risk trend is increasing. For example, German discounter Aldi currently operates 2,338 stores in the US, and this number rises to 3,319 if the stores of Trader Joe's, Harveys and Winn-Dixie are added. Although this company was no part of Ahold's peer group as it is privately owned, it does operate significantly more stores than Ahold Delhaize. Another interesting notion is that German discounter Lidl recently decided to take on Ahold at its home turf in the Netherlands. Ahold aims to promote local and healthy food as this generally sells at a premium. Lidl, however, decided to jump on this bandwagon, but in the tradition of a discounter: …Lidl in the Netherlands to permanently reduce prices on plant-based meat and dairy substitutes to make them equal or lower than their animal-based equivalents. While this example of a single product group may seem meaningless, it is actually a continuation of a trend Lidl started years ago. This trend is that next to a relentless focus on costs, the company invests more to attract customers. For example, in-store bakeries have become omnipresent and the appeal of the stores has improved as well. A further signal that the company targets customers with higher disposable income is that it competes on price to charge EV's. To further enforce the point that the company is actively reeling in customers, it started an advertisement campaign featuring Arnold Schwarzenegger. All of this does not fit in the strategy of a true price discounter and is clearly designed to compete with the likes of Ahold Delhaize, for example. Conclusion Ahold Delhaize maintains decent performance, but the strategy signals caution and, as such, there are little catalysts to support a substantial appreciation in stock price. So far, the company managed to keep up with the performance of its US peers, but hard work will be required to maintain this performance. Consistent share buybacks and a potential increase of the pay-out ratio do bode well for dividend growth and an increase of the 2024 dividend to €1.15 is expected (2023: €1.10), generating a 3.8 percent forward yield. Longer term, however, the development of free cash flow requires attention as the development of cash flow does not keep up with sales growth. Merely growing sales will not be sufficient to grow FCF and ultimately shareholder returns. On top of this, sufficient short and mid-term risks are present that have the ability to drive the share price lower. While I would not lose any sleep expanding my position at the current price, I believe it is worthwhile waiting for another discount.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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