This Grocer's Big Dividend Cut Won't Be Its Last

It just had to happen.

Roundy's (NYS: RNDY) was paying a dividend of over 16% with a payout ratio of over 80%. It could only maintain a payout like that if the company enjoyed strong profits, growing sales, and a clean balance sheet. Unfortunately, the Milwaukee-based grocery store chain does not.

The company reported dismal financial results for the third quarter of 2012 last Thursday after the market closed, and reduced its dividend from $0.23 a share to $0.12.

Along with halving the dividend, Roundy's reported net income for the third quarter of $7.9 million, or $0.18 per share. That's down year over year from $12.4 million, or $0.41 per share. Net sales continued to fall another 0.3% to $973.6 million, from $976.9 million in last year's third quarter. Same-store sales for the quarter dropped 3.6%.

Wall Street is now treating Roundy's like a gallon of sour milk that passed its expiration date a long, long time ago. The share price has fallen more than 20% in trading on Friday. More investors will likely sell now that the dividend has been slashed.

With same-store sales and net income dropping, it is difficult to see how Roundy's can maintain even its reduced dividend, however. At $0.12 a share, the payout gobbles up two-thirds of Roundy's net income. The company's debt-to-equity ratio of 2.32 is more than twice the industry average, while its net profit margin significantly trails that of competitors such as Wal-Mart (NYS: WMT) and Target (NYS: TGT) , while being slightly worse than Safeway (NYS: SWY) and Kroger (NYS: KR) . In the highly competitive grocery store sector , companies can find much better uses for their capital than paying unsustainable dividends.

Source: Motley Fool CAPS.

Regarding the dismal results and outlook for the company, Roundy's CEO Robert Mariano stated: "Customers did not respond as enthusiastically as we had expected to our Monopoly promotion program, which contributed to last year's very strong third-quarter results. As we look ahead, we are carefully examining our entire operation for ways in which we might improve sales and earnings and, accordingly, have already made adjustments to our pricing and promotions to drive our performance."

Roundy's has continued to disappoint investors since it went public this past February. For the last six months, Roundy's share price has fallen by more than 50%. With a huge short position on the stock, investors are betting that Roundy's fourth quarter won't include the improved sales and earnings Mariano's hoping for.

With its dividend cut and fall in earnings, Roundy's is not the stock for long-term investing. If you're looking for some long-term investing ideas that will generate profitable total returns (and who isn't?), check out the Fool's brand-new special report: "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so just click here and get your copy today.

The article This Grocer's Big Dividend Cut Won't Be Its Last originally appeared on Fool.com.

Jonathan Yates has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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