Consumer goods stocks Canadian Tire and Loblaw Companies both face similar difficulties with highly competitive market places and expected increases in minimum wages. But growing sales and continuing improvements in underlying operations make both these giant retailers consumer stocks to buy for growth and modest dividend income.
Canadian Tire (TSX—CTC.A) has delivered strong growth this year. The cyclical consumer goods stock’s second-quarter earnings per share, or EPS, increased 14 per cent year over year, for the second consecutive year. Despite the slow start to the spring and summer seasons, consolidated same-store sales, or sales at stores open for more than one year, rose 1.8 per cent.
Canadian Tire is a family of businesses that includes a retail segment, a financial services division and CT Real Estate Investment Trust. The retail business is led by Canadian Tire, which provides products across living, playing, fixing, automotive and seasonal categories.
For the six months ended June 30, 2017, Canadian Tire made $282.7 million (net income attributable to Canadian Tire shareholders), or $4.04 share, compared with $245.9 million, or $3.35 a share, in the same period of 2016. The increase reflects retail sales and revenue growth across all retail segment banners and the financial services segment, and improved gross margins at Canadian Tire, Mark’s, and the financial services segment.
Retail sales increased 3.3 per cent to 6.7 billion. Excluding petroleum, retail sales rose 2.1 per cent, driven by both seasonal and non-seasonal categories at Canadian Tire and Mark’s, owned brands at Canadian Tire, and licensed apparel and hockey sales at FGL Sports.
Despite a challenging retail environment, Canadian Tire is positioned to continue increasing its sales across all banners through ongoing category management, new product brands and assortments, and improved in-store and digital experiences.
Canadian Tire shares trade around a reasonable 15.0 times this year’s forecast earnings. The annual dividend yields about 1.6 per cent. CTC is a stock to buy for growth and some income.
A defensive consumer goods stock to buy
Loblaw Companies (TSX—L) delivered solid second-quarter results that were in line with expectations. Despite continued price deflation, overall revenue was up 3.2 per cent to $11.1 billion from the second quarter of 2016. Retail segment sales also rose 3.2 per cent, to $10.8 billion. Food retail, same-store sales, excluding gas bar, rose 1.0 per cent, reflecting the timing of Easter. Drug retail same-store sales were up 3.7 per cent.
Loblaw is a food and pharmacy leader, Canada’s largest retail stock, and the majority unit holder of Choice Properties Real Estate Investment Trust. Loblaw provides grocery, pharmacy, health and beauty apparel, general merchandise and banking and wireless mobile products and services. It has more than 2,300 corporate, franchised and associate-owned locations.
For the period ended June 30, 2017, Loblaw made $809 million (adjusted), or $2.02 a share, compared with $750 million, or $1.82 a share, in the same period of 2016. The increase was due to better underlying performance and the favourable impact of share buybacks. The latter accounted for $0.05 a share of the improvement.
Improvements in underlying operating performance accounted for $59 million, or $0.15 a share. The retail segment contributed to this performance through higher sales, which increased 1.7 per cent to $21.0 billion, and an increase in the adjusted gross profit margin to 27.9 per cent from 27.1 per cent.
In May, Loblaw declared a 3.8-per-cent increase in its quarterly dividend to $0.27 a share.
Despite a highly competitive grocery market, continued negative pressure from healthcare reform on drug prices and expected increases in the minimum wage, Loblaw adjusted earnings per share are expected to rise these next couple of years. Because of these headwinds, though, Loblaw stock has dropped in price since our spring update on the company.
Consequently, the stock now trades at a more reasonable valuation around 15.4 times this year’s forecast earnings. Meanwhile, the annual dividend of $1.08 a share yields 1.6 per cent. Loblaw is a buy for growth and some income.
This is an edited version of an article that was originally published for subscribers in the November 2017/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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