Couche-Tard has earned record profits for eleven years in a row. It should continue to do so as its aims to double its business over the next five years. This consumer stock remains a buy for further long-term share price gains and small, but growing dividends.
Montreal-based consumer stock Alimentation Couche-Tard Inc. (TSX—ATD.B) reported record earnings in the year to April 28, 2019. It’s expected to earn record profits again both this year and beyond.
The company writes: “For fiscal 2020 [fiscal years end in late April], we want to continue building on our success and drive to attain our very ambitious objective to double our business again in the next five years.” Couche-Tard also continues to raise its dividend each year and remains a ‘dividend aristocrat’. It remains a buy, mostly for further long-term share price gains, supplemented by small, but growing dividends.
Couche-Tard is expanding worldwide
Couche-Tard is “the leader in the Canadian convenience store industry. In the United States, it is the largest independent convenience store operator in terms of the number of company-operated stores. In Europe, Couche-Tard is a leader in convenience store and road transportation fuel in the Scandinavian countries (Norway, Sweden and Denmark), in the Baltic countries (Estonia, Latvia and Lithuania) as well as in Ireland, and has an important presence in Poland.”
Under licensing agreements, more than 2,150 stores are operated under the Circle K banner in Cambodia, China, Costa Rica, Egypt, Guam, Honduras, Hong Kong, Indonesia, Macau, Mexico, Mongolia, New Zealand, Saudi Arabia, the United Arab Emirates and Vietnam. The only continent where it’s lacking a presence is in South America.
Couche-Tard has 16,025 stores and counting
By April 28, 2019, Couche-Tard operated 9,866 stores in all 10 Canadian provinces and 48 of the 50 US states. Of these outlets, 8,629 include gas stations. Also, through CrossAmerica Partners, Couche-Tard supplies gas to 1,300 locations in the US. In Europe, Couche-Tard operated 2,709 stores at the beginning of fiscal 2020. Most of these stores sell gasoline.
Couche-Tard’s total worldwide network stands at 16,025 stores. One reason such a large network succeeds is its “super local focus on regional business units that understand the needs and appetites of our customers”. The fact is, decentralization works best when customers differ from country to country and local management knows what works.
Record EPS up by 27.7 per cent
In the year to April 28, Couche-Tard achieved record adjusted diluted net earnings of US$3.32 a share (all numbers are in US dollars unless preceded by a C). This was up by a healthy 27.7 per cent from $2.66 a share, the year before. The company has earned record-high earnings for 11 years in a row, from only 31 cents a share in fiscal 2006.
Couche-Tard’s much higher earnings were confirmed by much higher cash flow. In fiscal 2019, it generated cash flow of $3.0 billion. This was up by nearly 27 per cent from cash flow of $2.37 billion, the year before.
Couche-Tard used its growing cash flow to reduce its debt by a net $1.8 billion in fiscal 2019. This gives it a net debt-to-cash-flow ratio of 2.05 times. This is safe given the company’s growing earnings, cash flow and geographical diversification. Hurricanes in the Southern US, for instance, would have a limited impact on the company’s profits. In fiscal 2019, Couche-Tard invested a net $929 million in capital spending. And it paid dividends of $181 million. It’s changing most of its outlets to the Circle K brand.
Couche-Tard is a ‘dividend aristocrat’
Couche-Tard first began paying dividends in fiscal 2004. That year it paid three Canadian cents a share. Since then, the company has raised its dividend 10 years and never reduced its dividends. This includes increases in each of the last six years.
This means that Couche-Tard remains a ‘dividend aristocrat’. We use that term to refer to Canadian companies that have raised their dividends for at least five consecutive years. The only thing is that Couche-Tard’s shares have gone up so much that the dividend of 45 Canadian cents yields only 0.55 per cent.
Couche-Tard’s P/E ratio is acceptable
As Couche-Tard integrates past acquisitions, such as CST Brands, we expect its earnings and cash flow to grow. In fiscal 2020, for instance, the company is expected to earn $3.46 a share. That would represent earnings growth of 4.2 per cent. These earnings work out to C$4.51 a share. That gives the shares a P/E (Price-to-Earnings) ratio of 18.3 times. Given Couche-Tard’s ongoing earnings growth, we find this P/E ratio acceptable.
Couche-Tard’s businesses are improving
Analyst Justin Hellman sees other advantages with Couche-Tard. He writes that “the company ought to find success rolling out more private-label products, which, we think, will be good news for both the top [sales] and bottom [earnings] lines.” We agree. That’s because private-label products typically come with wide profit margins. Mr. Hellman adds: “The fuel business, meanwhile, will likely get a boost from supply chain improvements and a mix shift toward premium gasoline.”
With a net debt-to-cash-flow ratio of just over two times, we expect Couche-Tard to make more acquisitions in fiscal 2020. This will assist it in doubling its business over the next five years.
This is an edited version of an article that was originally published for subscribers in the July 26, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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