Consumer retail stock Metro Inc. earned record profits in fiscal 2018. It acquired The Jean Coutu Group on May 11. Coutu will contribute for a full year in fiscal 2019. Metro remains a buy for long-term share price gains as well as modest, but growing dividends.
Metro Inc. (TSX—MRU) earned record profits in the year to September 28, 2018. It acquired The Jean Coutu Group on May 11. Coutu will contribute throughout fiscal 2019 (which began on September 29). We expect this to increase Metro’s earnings next year—particularly as it integrates Coutu. Metro remains a buy for long-term share price gains and modest, but growing dividends.
In fiscal 2018, Metro achieved record adjusted earnings of $607 million, or $2.52 a share, excluding one-time items. This was up by 9.1 per cent from adjusted earnings of $548 million, or $2.31 a share, the year before. What makes this year’s results even better is that the company operated for 52 weeks last year—one week less than 53 weeks the year before.
Metro acquired Coutu on May 11. As a result, Coutu contributed to Metro’s results for just over 20 weeks last year. This year, Coutu will contribute for a full year. President and chief executive officer Éric La Flèche said: “The integration work is progressing well and we are confident in our ability to realize the full potential of this promising business combination.” In fact, annualized synergies currently total $17 million. As the synergies grow, so will Metro’s earnings.
Metro is achieving synergies with Coutu
Metro will soon transfer operations from an existing warehouse to Coutu’s warehouse. It has reduced administrative positions and eliminated Coutu’s costs as as public company. Metro has also closed three Brunet drugstores and divested 10 other drugstores.
Last year, business acquisitions cost Metro $3.033 billion. On September 29, its debt stood at $2.644 billion. Subtract cash of $227 million and the company’s net debt was $2.417 billion.
We usually assess the net debt by dividing it by the cash flow over the previous four quarters. The trouble is, the acquisition contributed cash flow for only 20 weeks while adding to the net debt. This can make the debt look worse than it actually is. That’s why we divide the net debt by the shareholders’ equity after a big acquisition. Divide the net debt by the shareholders’ equity of $5.656 billion and you get a safe net debt-to-equity ratio of just 0.427 to one.
Even better, Metro generates excess cash flow. Last year, it generated cash flow of $805 million. This was up by 12.1 per cent from cash flow of $718 million the year before. (This confirms Metro’s higher earnings.) Last year’s cash flow significantly exceeded net capital spending of $285 million and dividend payments of $165 million. This should enable the company to repay the debt and maintain considerable financial flexibility.
Even a modest dividend brings benefits
As Metro’s earnings grow, we expect it to continue to raise its dividend. It now pays 72 cents a share. That yields a modest 1.6 per cent. On the positive side, the company rewards you while you wait for share price gains. This gives you more cash to reinvest. And as the dividends grow, income-seeking investors are likely to bid up your shares.
In fiscal 2019, Metro is expected to earn a record $2.88 a share. That would represent healthy earnings per share growth of 13.8 per cent. Based on this earnings estimate, the shares trade at a price-to-earnings ratio of 15.7 times. That seems reasonable given the acceleration in its earnings growth.
This is an edited version of an article that was originally published for subscribers in the December 7, 2018, 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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