Consumer stock CTC makes loads of ‘real’ money

Canadian Tire money, or Sandy McTire loyalty bucks, have been around since 1958. People save them for years to make large purchases, other stores have been known to accept them as cash and Salvation Army ‘kettles’ get stuffed full with them at Christmas. But you’ll need real money to buy this consumer stock’s shares, which in turn will reward your loyalty with very real money in capital gains and growing dividends.

Toronto-based cyclical consumer stock Canadian Tire Corporation (TSX—CTC.A), or CTC, earned more in 2016. It’s expected to earn more this year and next. This will let the company keep raising your dividends and buying back shares each year. It remains a buy for further long-term share price gains and decent, growing dividends.

CTC calls itself a family of businesses including a retail segment, a financial services division and CT REIT (Real Estate Investment Trust). The apparel and specialty retail segment is by far the most important part of the company. It includes Canadian Tire stores, PartSource, Gas+, Mark’s (which sells casual and industrial clothes) and FGL Sports (Sport Chek, Hockey Experts, Sports Experts, National Sports, Intersport, Pro Hockey Life and Atmosphere). CTC’s offerings of products and services is broad and diversified. It’s also geographically diversified, with 1,700 retail and gasoline outlets across Canada.

In 2016, this blue chip Canadian stock earned $747.5 million, or $9.22 a share. This was up by 7.1 per cent from $735.9 million, or $8.61 a share, the year before.

Same-store sales rose by 4.2 per cent at Canadian Tire, by 7.6 per cent at FGL Sports, and 6.1 per cent at Mark’s. This was positive. President and chief executive officer Stephen Wetmore said, “I am very pleased with our results as they demonstrate the strength of our company and our unique ability to provide our customers with the products for life in Canada.”

But keep two things in mind.

First, CTC’s 2016 earnings per share growth was faster than it looks at first glance. In 2015, it earned a one-time gain of 33 cents a share from selling surplus land. Adjust for this and the company earned $8.28 a share in 2015. So 2016 earnings per share increased by 11.4 per cent, better than the reported 7.1 per cent.

Second, CTC’s earnings per share grew faster than its total earnings. That’s because it spent $449.4 million buying back its shares. This more than offset the issuance of shares under stock option plans and the DRIP (Dividend Re-Investment Plan). The weighted average number of diluted shares outstanding fell by 4,025,872, to 72,555,732. By the fourth quarter, the average share count had fallen further, to 71,249,119. In the year to March 1, 2018, the company plans to repurchase up to six million shares. It expects this to again greatly exceed the issuance of shares under stock option plans and the DRIP.

Rising cash flow confirms earnings growth

In 2016, CTC’s cash flow rose by 4.2 per cent, to $1.166 billion. This confirms its higher earnings. Even better, it exceeded the company’s needs: net capital investment of $748 million; dividend payments of $158 million; and distributions to non-controlling interests of $76 million. The excess cash flow totaled $185 million.

CTC used its growing earnings and cash flow to reward its shareholders. For 2017, it has raised its dividend by a whopping 23.8 per cent, to $2.60 a share. The company remains what’s known as a ‘dividend aristocrat’. (In Canada, that’s a company that has raised its dividend for at least five years in a row). Despite rising steadily for years, CTC’s dividend yields 1.7 per cent. That’s because the shares have risen so much. We expect the company to continue to raise its dividend. And CTC rewards its shareholders with share buybacks.

Mr. Wetmore is upbeat about CTC. He says that its “strength, coupled with our expertise, and the power of our brand provides the foundation for our future growth”.

Total earnings, eps, cash flow and share price all growing

In 2017, CTC earnings are expected to increase by 10 per cent, to $10.14 a share. Based on this estimate, the shares trade at a reasonable price-to-earnings, or P/E, ratio of 15.1 times. Next year, the company’s earnings are expected to advance by 9.4 per cent, to $11.09 a share. Based on that estimate, the shares trade at a better P/E ratio of 13.8 times.

Management owns only four per cent of CTC’s shares. Even so, we do not expect an activist shareholder to appear. That’s because the Class A shares are non-voting. Only the CTC.B shares vote. The founding Billes family owns most of these shares. Any transaction with an outside party would require their blessing. Then again, the Billes family can manage for long-term growth rather than trying to meet quarterly targets.

The consensus recommendation of four analysts is that Canadian Tire is a ‘buy’. We agree. It remains a buy for further long-term share price gains and decent, growing, dividends.

 

This is an edited version of an article that was originally published for subscribers in the March 17, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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