A defensive consumer stock that’s a dividend aristocrat

The North West Company Inc. is a retailer of food and everyday products and services to rural communities and smaller urban neighborhoods in Canada, Alaska, the South Pacific, and the Caribbean. This consumer goods stock faces far less competition than retailers in big cities.

We expect Winnipeg-based North West Co. (TSX—NWC), or NWC, to earn more in fiscal 2017 and fiscal 2018 (fiscal years end January 31). We also expect this ‘dividend aristocrat’ to keep raising its dividends each year. That’s why NWC remains a buy for long-term price gains plus high and rising dividends.

NWC sells “food and everyday products and services to rural communities and urban neighbourhoods in Canada, Alaska, the South Pacific and the Caribbean”. This reduces the competition it faces compared with retailers in crowded centres of the big cities. The company “operates 230 stores under the names Northern, NorthMart, Giant Tiger, AC Value and Cost-U-Less and has annualized sales of . . . C$1.8 billion”. It earns 61 per cent of its sales in Canada.

Quality rating raised to ‘Conservative’

We’ve raised NWC’s quality rating by a notch, to ‘Conservative’. That’s because its assets have grown. On October 31, the company’s assets totaled $848 million. Subtract goodwill of $38.7 million and its adjusted assets come to $809 million. This gives it our quality rating of ‘Conservative’. Since NWC generates repeat business by selling consumer staples, it remains at its level-one rating of ‘Conservative’.

In the nine months to October 31, NWC earned $62.1 million, or $1.27 a share. This was up by 13.4 per cent from $54.6 million, or $1.12 a share, year earlier. Sales rose more than costs and the tax rate fell.

In the first nine months, NWC’s sales grew by 3.2 per cent, to $1.364 billion. This was thanks to a 1.4 per cent rise in same-store sales and more stores. NWC’s regular operating costs as a group went up by 2.9 per cent. With sales growing more than costs, earnings rose, of course. Also, NWC profited from the higher U.S. dollar. And its income tax rate fell by 3.3 percentage points, to 28 per cent.

In the nine months, NWC’s cash flow rose by 11.4 per cent, to $103 million—confirming its earnings growth. Even better, the cash flow exceeded total investment of $53.9 million and dividend payments of $45.1 million.

Low debt and a defensive consumer retail market

With modest excess cash flow, NWC has safe debt. Subtract cash of $47.6 million from debt of $259 million and its net debt is $211.4 million. The company generated cash flow of $131.9 million over the last four quarters. Divide net debt by this and its net debt-to-cash-flow ratio is 1.6 times. That’s in our comfort zone of two times or less. Especially for a defensive consumer retailer that generates stable cash flow by selling necessities. In the first nine months, food accounted for 80.6 per cent of its sales, general merchandise for 16.4 per cent and ‘other’, three per cent.

NWC also reinvests. It opened Giant Tiger stores in Alberta and Manitoba. The company expects to invest capital of $85 million “reflecting major store replacements, store renovations and investments in fixtures, equipment, staff housing and store-based warehouse expansions as part of the Company’s Top Markets initiative”.

NWC’s strategy is “building a stronger store network with better products and services that help our customers live better and help our businesses grow consistently in all economic environments”. This involves investing in its top categories in its top stores. It expects this “to enable North West to capture market share and sales at a higher rate than general consumer income growth”.

NWC plans to acquire Road Town Wholesale Trading. It operates RiteWay Food Markets in the British Virgin Islands. This should expand NWC’s international business.

Dividend aristocrat but with low management ownership

NWC is a ‘dividend aristocrat’. (In Canada, a dividend aristocrat is a company that has raised its dividends for at least five years in a row). In fiscal 2012, NWC paid a dividend of 96 cents a share. After raising its dividend for five consecutive years, it now pays $1.24 a share. This yields an attractive 4.5 per cent.

We expect NWC to earn $1.60 a share in fiscal 2017—earnings per share growth of 11.9 per cent from $1.43 a share last year. The fourth quarter, which covers the holidays, is the company’s strongest. Based on this year’s estimate, the shares trade at a price-to-earnings, or P/E, ratio of 17.2 times. In fiscal 2018 (which starts February 1), NWC is expected to earn $1.75 a share. Based on this estimate, the shares trade at a better P/E ratio of 15.7 times. NWC earns a high return on the shareholders’ money.

One thing we’re unimpressed with is that management owns only 0.7 per cent of the shares. The good thing about shares—as opposed to stock options-based compensation programs—is that it makes management share your pain if it makes mistakes.

But on balance, NWC remains a buy for long-term share price gains as well as attractive and growing dividends.

 

This is an edited version of an article that was originally published for subscribers in the January 13, 2017, 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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