A stock for capital gains and growing dividends

Consumer retail stock Canadian Tire is earning more as its same-store sales rise and its gross profit margin expands. Its planned acquisition of Helly Hansen knocked down its shares. The company remains a buy for long-term share price gains and modest, growing dividends.

Growing_DividendsToronto-based Canadian Tire Corp., or CTC (TSX—CTC.A), is generating higher same-store sales. It earned more in the first quarter of 2018, excluding a one-time item. The company is using its rising profits to grow—though an acquisition has upset the market (see below). The shares are less costly than they were before. It’s also rewarding its shareholders by raising its dividend sharply and buying back its shares. CTC remains a buy for long-term share price gains and modest, growing dividends.

In the three months to March 31, CTC reported earnings of $1.18 a share. This was down from $1.24 a share, a year earlier. But this reflected a tax effective, one-time accelerated depreciation expense of 19 cents a share in the first quarter. Exclude this and the company earned $1.37 a share, up by 10.5 per cent.

CTC’s retailers are doing well

One plus was a 5.2 per cent rise in same-store sales from a year earlier. This is a crucial statistic for retailers. What’s more, same-store sales rose at CTC’s three main banners: up 5.8 per cent at Canadian Tire; up 3.9 per cent at FGL Sports; and up 3.4 per cent at Mark’s. Also, the gross profit margin climbed by 74 basis points (a basis point is a hundredth of one per cent).

President and chief executive officer Stephen Wetmore said: “I am pleased with the continued momentum in the top-line [sales] and margin performance of our retail businesses.”

In all of 2018, CTC’s earnings are expected to increase by 9.8 per cent, to $11.94 a share. It’s making good use of its prosperity. It’s acquiring large Norwegian supplier Helly Hansen (see below), among other investments.

CT REIT (Real Estate Investment Trust) unveiled four new investments. The amount invested will total $35 million. CTC’s capital spending was $45.4 million in the first quarter.

Dividend aristocrat also buying back its shares

CTC is also rewarding its shareholders. It’s a dividend aristocrat that raises its dividend each year. In 2018, the company is paying $3.60 a share. That’s up by nearly 36 per cent from $2.65 a share last year.

CTC buys back its shares. In the first quarter, it spent $216 million. This leaves another $334 million for share repurchases. Also, under a normal course issuer bid, the company can buy back up to another 5.9 million shares until March 1, 2019.

CTC acquires a supplier

CTC will pay $985 million and assume $50 million of debt to acquire Helly Hansen of Norway. It’s a “leading global brand in sportswear and workwear. . . . Within its core categories of sailing, skiing, mountain, urban, rainwear and workwear, Helly Hansen designs and delivers products used by professionals and outdoor enthusiasts around the world.” It operates in over 40 countries. CTC is already one of Hansen’s largest customers. The acquisition will strengthen CTC’s core outdoor and workwear businesses.

The acquisition of Hansen will immediately add to CTC’s earnings and cash flow. It expects to reap synergies. And it expects the acquisition to speed up sales of current and future brands internationally. A plus is that Hansen’s management will remain for now. The acquisition is expected to close in the third quarter of 2018.

Canadian Tire remains a buy for long-term share price gains plus attractive and growing dividends.

This is an edited version of an article that was originally published for subscribers in the May 25, 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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