How to get a rebate on the high cost of groceries

Supermarket customers like to complain about long cashier line-ups endured to pay for the ever-rising cost of their groceries. You’ll dislike this a whole lot less if you own the place and you’re getting paid in the form of rising dividends and share price gains.

Consumer goods stock, Montreal-based Metro Inc. (TSX—MRU), earned record profits again in fiscal 2016. This gives it the means to keep on raising your dividends and buying back its shares. This chain grocery store stock remains a buy for long-term share price gains and growing dividends.

In the year to September 24, Metro earned a record $586 million, or $2.39 a share. This was up by 17.7 per cent from earnings of $524 million, or $2.03 a share the year before (excluding one-time items in both years). Metro’s share of the earnings of Key consumer goods stock Alimentation Couche-Tard (TSX—ATD.B) was $91.1 million before taxes in fiscal 2016. That was up substantially from a pre-tax $64.3 million, the year before.

Metro also raised its earnings per share by repurchasing shares

In fiscal 2016, Metro’s earnings per share rose by more than its total earnings. That’s because it spent $331.3 million to buy back 8,477,000 shares in fiscal 2016. This was only slightly offset by the issuance of 703,000 shares for $10.3 million, under stock options.

Metro can buy back up to 12 million shares until September 11, 2017. Between September 12 (when the last buyback program expired) and October 28, it spent $96.5 million to repurchase 2,284,380 shares.

Metro’s repurchases spread its earnings over fewer shares. This automatically raises the earnings per share. Higher earnings per share can justify a higher share price. Repurchases also add to the demand for Metro’s shares. This is one way that it rewards you. The other way is by raising your dividends.

Same-store sales climbed by 3.7 per cent

In fiscal 2016, Metro’s sales rose by 4.6 per cent, to $12.788 billion. Its crucial same-store sales went up by a healthy 3.7 per cent. The company and its retailers opened eight new stores. It also carried out major expansions and renovations at 42 existing stores. Metro paid $35 million to acquire three affiliated stores in Quebec and a food store in Ontario.

Metro’s regular operating costs as a group went up by 4.3 per cent. With sales rising faster than costs, earning increased, of course.

Metro’s higher earnings were confirmed by higher cash flow. In fiscal 2016, its cash flow rose by 6.4 per cent, to $924 million. What’s more, the cash flow exceeded net capital investment of $303.3 million, acquisitions of $35 million and dividend payments of $127.1 million. It used part of the excess cash flow of $458.6 million to buy back shares.

Metro has a strong balance sheet. Its net debt-to-cash-flow ratio is a safe 1.3 times. This is within our comfort zone of two times or less. With stable and recurring revenue, its debt burden is even lighter. The company has not used a revolving credit facility under which it could borrow up to $415.4 million.

Metro retains its ‘dividend aristocrat’ status

With excess cash flow and a strong balance sheet, we expect Metro to continue to reward its shareholders. While the dividend of 56 cents a share yields only 1.4 per cent, at least they’re rising quickly. In fiscal 2016, this long-standing ‘dividend aristocrat’ raised its dividend by a fifth as it continued to buy back shares.

President Eric La Flèche is optimistic about Metro’s outlook. He said: “Despite a highly competitive environment and current low food price inflation, we are confident that the execution of our business plans and our investments in our store network will allow us to continue to grow.”

In fiscal 2017 (which began September 25), Metro’s earnings are expected to rise by 7.5 per cent, to $2.57 a share. Based on this estimate, the shares trade at a price-to-earnings, or P/E, ratio of 16.0 times. In fiscal 2018, its earnings are expected to advance by 9.3 per cent, to $2.81 a share. Based on this estimate, its P/E ratio is a better 14.6 times.

Metro Inc. remains a buy for long-term share price gains and modest, growing dividends.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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