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Safeway has healthy cash flow but faces competition

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Question: I am concerned about my shares of Safeway Inc. and wonder how the company is going to hold up against its competition.

Answer: The logic of investing in the stock of grocery chains has traditionally been that people must eat, but the business of selling food has become more competitive.

The nation’s third-largest retail grocery chain, Safeway operates about 1,700 stores in the U.S. and Canada — including 312 Vons stores in Southern California and Nevada — plus more than 30 manufacturing facilities that make one-fourth of its private-brand products.

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The company has done a fine job of developing those private brands and spent considerable money to modernize its stores. Recent capital-spending reductions have increased Safeway’s already healthy cash flow, and the firm regularly buys back shares.

That’s the good news. The bad news, aside from a weak economy: Everyone seems to want to get into the grocery business.

In addition to traditional grocery competitors, Safeway must battle low-priced operators such as Wal-Mart Stores Inc., Costco, Target Corp. and Family Dollar Stores Inc., as well as drugstores such as Walgreen Co. and CVS Caremark Corp. That means a less certain future and more modest earnings prospects for the grocery industry than in the past.

In 2009, Safeway incurred a $1.1-billion loss as its sales slumped 7.4% to $40.8 billion. The company, however, has been profitable this year. In the third quarter, earnings fell 4.7% from a year earlier, while sales edged down.

Safeway shares are up 1.3% this year after sinking 10% last year.

Analyst ratings on Safeway shares vary widely, consisting of two “strong buys,” four “buys,” seven “holds,” five “underperforms” and two “sells,” according to Thomson Reuters.

A fund with few surprises

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Question: I am thinking of investing in a balanced mutual fund and would like to know your thoughts on American Funds American Balanced.

Answer: Following a virtuous path of buying quality stocks and bonds, American Funds American Balanced appeals to investors who don’t like surprises.

By definition, a balanced fund mixes stocks and bonds to iron out volatility in the market value of the portfolio. This fund’s ability to amass $49 billion in assets suggests many investors have found in it just what they want.

American Funds American Balanced has earned a total return of 12% over the last 12 months, for a three-year annualized gain of 0.6%. Both results rank it above average for so-called moderate allocation funds. Its 10-year annualized return of 5.8% places it in the top 6% of its peers.

All seven of the fund’s managers have been with American Funds for more than 15 years.

About 60% of the portfolio is in stocks, with 31% in bonds, according to Morningstar.com.

The fund requires a $250 minimum initial investment and imposes a 5.75% sales charge, or “load,” on share purchases. Its annual expenses are a reasonable 0.67% of assets.

Andrew Leckey answers questions only through the column. Write to him at yourmoney@tribune.com.

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