Buy Loblaw for capital gains and income

Consumer retail stock Loblaw Companies is expected to earn more this year and next. That’s partly thanks to buying back its shares. The company is investing in electronic commerce. It keeps raising its dividends. Loblaw remains a buy for share price gains and growing dividends.

LoblawLoblaw Companies (TSX—L) expects slower earnings growth in 2018. Then again, it expects its earnings growth to accelerate significantly next year. The company continues to reward its shareholders by raising its dividend each year and by repurchasing its shares. Loblaw remains a buy for long-term share price gains as well as modest, but growing dividends.

Loblaw is a retailer of food products that also provides drugstore, general merchandise and financial products and services. The company operates corporate-owned stores as well as franchised stores.

In the first quarter to March 24, Loblaw earned an adjusted $361 million, or 94 cents a share. This was up by 3.3 per cent from adjusted earnings of $366 million, or 91 cents a share, a year earlier.

Earnings per share went up even though total earnings went down. That’s because Loblaw continues to buy back its shares. In the first quarter, it spent $544 million to repurchase 8.1 million shares. It will buy back more shares throughout 2018.

Same-store sales increased

Loblaw’s same-store sales increased by 1.9 per cent. Shoppers Drug Mart’s same-store sales rose by an even better 3.7 per cent. Its same-store sales increased in both its drug and front store. The improvement in same-store sales bodes well for Loblaw.

In 2018, Loblaw is expected to earn $4.72 a share. That would represent modest earnings growth of 4.2 per cent, from $4.53 last year. It writes that higher minimum wages in Ontario and Alberta as well as “healthcare reform will negatively impact the Company’s financial performance in 2018”.

Partly mitigating this is minimum-wage workers who can better afford to shop for food. Also, next year’s proposed rise in Ontario’s minimum wage to $15 an hour will depend on the outcome of the provincial election. If the Conservatives win, they would likely eliminate the minimum-wage increase. If the NDP or the Liberal Party wins—or form a coalition government—the minimum wage would go up.

Based on this year’s estimate, Loblaw’s shares trade at a reasonable P/E (Price-to-Earnings) estimate of 13.9 times. Next year, its earnings are expected to grow by a more respectable 10.6 per cent, to $5.22 a share. Ongoing increases in its earnings per share should raise Loblaw’s share price over time.

Loblaw is growing online

Loblaw expects to reinvest $1.3 billion into its businesses in 2018. More than three-quarters of this, or $1 billion, will go to its retail segment. This includes expanding its electronic-commerce business.

Chairman and chief executive officer Galen G. Weston said: “As the retail landscape changes, we are now rapidly scaling our e-commerce pick up and home delivery services to blanket Canada this year.”

This initiative makes sense. For one thing, an aging and increasingly affluent population is likely willing to pay a little more to order groceries online and have them delivered. Particularly in the cold and icy winter months.

For another thing, Loblaw recognizes that the giant US retail stock would gladly steal its customers by offering to deliver groceries from subsidiary Whole Foods. So building and expanding its own electronic-commerce platform will assist Loblaw’s competitiveness.

Loblaw retains its dividend aristocrat status

Loblaw has rewarded its shareholders by raising its dividend again. It will now pay $1.18 a share. That’s up by 9.3 per cent from $1.08 a share. The company remains a ‘dividend aristocrat’ after raising its dividend for more than five years in a row. All else being equal, growing dividends are likely to attract income-seeking investors who will bid up the price of your shares. Due to the rise in Loblaw’s share price, however, the dividend yields a modest 1.8 per cent.

Loblaw remains a buy for long-term share price gains as well as modest, but growing dividends. 

This is an edited version of an article that was originally published for subscribers in the June 1, 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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