Tickers in this Article: WEN, YUM, SWY, L.TO, WMT, FDO, COST
The growing number of health and money conscious consumers in this period of obesity epidemics and food inflation has many customers turning from fast food to home cooked meals. While Wendy's (NYSE:WEN) and Yum! Brands (NYSE:YUM) continue to perform well, an increasing number of consumers are turning to grocery stores. Safeway (NYSE:SWY), is one such grocery store that really stands out above the rest.

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Improved Performance
Safeway has produced strong stock returns through 2011, driven by forecasted top line growth and the ability to pass on rising costs to consumers. After facing a $1.1 billion dollar net loss in 2009, the company slightly scaled back some of its operations, closing a net 31 stores, and realized a subsequent 2010 profit of $589.8 million. While identical-store sales showed a marginal 0.7% decrease, most of the bottom line performance improvement is attributed to the omission of pretax goodwill impairments which played a significant role in the 2009 poor performance figures.

Superior Margins
Of the remaining 1,694 stores, most locations are concentrated in Alberta, California, Colorado and Washington, among other states. Although the Canadian portion of the business is growing, U.S. stores contribute to 85% of total revenue. Safeway operates at a fairly consistent gross profit margin of around 28%. In contrast, Loblaw (TSE:L), Canada's largest food distributor, operates at gross margin of about 25%, which is more or less comparable to other major players in the grocery business. Safeway's higher quality products allow for higher pricing strategies.

More Potential
Management remains fairly cautious about future expectations as tight economic conditions may force consumers to turn to "to a less expensive mix of products [as consumers trade] down to discounters for grocery items." However, as the unemployment rate shows its fourth consecutive decrease to 8.8% and as CEOs announce new hiring, it is unlikely that Safeway will lose additional customers to Wal-Mart (NYSE:WMT), Family Dollar Stores (NYSE:FDO) or even Costco (Nasdaq:COST). During the company's conference call, CEO Steve Burd announced that Safeway has experienced a positive sales trend through 2011.

Dividends and Buybacks
Safeway has been actively involved in share buyback programs since 1999. After repurchasing 7.5 million shares at an average price of $22.66 in 2010, the board of directors authorized a one billion dollar increase of the repurchase program, expanding the cumulative budget to $7 billion. At current prices, Safeway is authorized to repurchase 72.16 million shares which represents 19% of the weighted number of diluted shares outstanding. The repurchase program does not have an expiration date. Furthermore, in addition to targeting financing activity cash flow toward paying down significant portions of debt for three consecutive years, Safeway has bean steadily increasing its dividend payouts. The stock currently supports a dividend yield of 2%.

Bottom Line
High margins, strong growth prospects and a stable balance sheet provide Safeway with substantial upside potential within the upcoming years. Also, In contrast to the industry, which has seen an average dividend 5 year growth rate of 4.7%, Safeway has grown its dividend by over 25%. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. Check out How To Pick A Stock.)

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