A Speculative Stock That Is A Good Source Of Passive income

When you are building an investment portfolio, your stock selections should be based on the fundamentals. My favorite stocks have low P/E ratios, above average growth rates, and small amounts of debts. Although most of the stocks that I buy fit into this category, I do allow myself the right to speculate. Over the past two years, I have been taking a gamble on a couple of turnaround plays. Today, I want to take a look at one of them.

 

The stock that I have been buying is Supervalu (SVU).

Supervalu is one of the largest grocery chains in the country with over 2,500 stores in the United States. The company owns Albertsons, Sav-A-Lot, and several other grocery store brands.The company has a significant market share in several large United States cities.

The stock has been a dog for years as the company has been plagued by massive amounts of debts and declining revenue growth. Supervalu has recorded 3 straight years of negative same store sales growth. The stock declined to $7 a share this year as investors feared that the company may declare bankruptcy. Investors and analysts downgraded the stock to a sell. Fortunately for Supervalu, the company was recently able to amend terms of its credit agreement affecting roughly $1.28 billion in long term debt.

Supervalu Stock

Supervalu’s shares have bounced recently as the company has benefited from low expectations. Despite profitability decreasing 2.1%% last quarter and sales revenue declining 6%, the company was able to exceed analyst expectations earning $95 million dollars in profit which equaled44 cents per share. Analysts were expecting EPS to come in at 33 cents per share. Full year earnings are expected to come in at $1.20 per share.

There are a few things that I like about Supervalu. The company has a significant amount of assets and generates tremendous amounts of cash flow from operations. Despite facing food price inflation and rising costs, the company has been able to earn over $1 billion dollars in free cash flow annually. If the company can ever free itself from its massive debt burden, this would lead to a major increase in shareholder equity.

The grocer still earns $38 billion dollars in annual revenue and has been taking steps to improve its results. Supervalu has been enacting a plan to trim more than $115 million dollars from its existing costs. The plan has included closing stores and laying off unnecessary staff such as the 900 part time employees recently laid off. These moves were made to combat the effects of slowing growth at some locations, rising pension and healthcare costs.

Supervalu Is Super Speculation

Supervalu makes the list of solid dividend stocks despite cutting its dividend back in 2009 in order to preserve capital. Even with the dividend cut, the stock is still yielding 3.15%. The company would like to keep its dividend since it has paid one for more than 60 years. The current dividend payout is sustainable since it represents just 29% of this year’s earnings. This is a surprisingly good passive income source for a speculative stock.

This is a long term turnaround story as the company has another rough few quarters ahead of it. Earnings growth is expected to return in a year. Long term speculative stocks like this are great for making incremental purchases. I add shares during dips and hope to have a sizeable position once the stock turns.

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9 Responses to “A Speculative Stock That Is A Good Source Of Passive income”

  1. Do you think Supervalu is going to have its small margins squeezed by high gas prices? A large segment of its business is distribution, and refrigerated trailers aren’t cheap to operate.

    • avatar Mark says:

      Robert, I think that high gas prices and competition have been squeezing margins for the last quarter or two. Hopefully, a drop will increase them.

  2. avatar Bb says:

    You can only cut cost to an extend. It can’t increase price unless other stores do. With inflation, it can only get worse.

  3. Wow, Supervalu is super risky. I wish you the best with this one. Buying in at $7 would have produced great returns so far!

  4. Great tip about Supervalu. I agree with Dividend Mantra about it being risky, especially after seeing quarterly declines, but my philosophy is to risk what you’re willing to lose. In my experience, it usually pays off nicely. Good luck to you and your portfolio.
    Thanks,
    Timothy

    • avatar Mark says:

      Tim,

      I figure it is a very small portion of my portfolio so I can take the risk. I think the risky stocks can be the biggest gainers.

  5. As always, thanks for your tips. I will keep it on my radar. I have some cash saved up and I’m looking for another good dividend paying investment.

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