Keep buying Metro Inc. for capital gains and dividends

Metro Inc. earned more in fiscal 2014, which sent its share up. This supermarket chain is expected to earn more in fiscal 2015 (which began on September 28) and fiscal 2016. Growing earnings, share buybacks, excess cash flow and low debt will enable it to continue to reward you. The company remains a buy for long-term share price gains and rising dividends.

In the year to September 27, Metro earned $461 million, or $5.13 a share, excluding last year’s sale of much of its stake in Alimentation Couche-Tard and other one-time items in both years. These adjusted earnings were up by 8.5 per cent from $461 million, or $4.73 a share. It’s expected to earn $5.69 a share in fiscal 2015 and $6.13 a share in fiscal 2016.

Metro’s total profit was unchanged in fiscal 2014. Its earnings per share rose thanks to repurchases of its own shares. In fiscal 2014, it bought back 7,093,000 shares. This greatly exceeded the issuance of 189,000 shares from the exercise of stock options. In fiscal 2015, the company can repurchase up to 5,700,000 shares. By Halloween, it had already bought back 755,200 shares. If Metro buys back the remaining 4,044,800 shares, it will raise its fiscal 2015 earnings per share even if total profit is unchanged.

Sales went up more slowly than costs

In fiscal 2014, sales inched up by 1.7 per cent, to $11.6 billion. More importantly, same-store sales climbed by 1.1 per cent. The acquisition of Première Moisson added 0.5 per cent to its fourth-quarter sales. President and chief executive officer Eric La Flèche says, “We are encouraged by the improved sales performance across all our banners. We completed the acquisition of Première Moisson in the fourth quarter and we will continue to invest in our network and execute our business plans to pursue our growth.”

Metro’s operating and financing costs as a group rose by 1.9 per cent. Since this outpaced the sales growth, its pre-tax income declined slightly on an unadjusted or reported basis. Last year’s lower income on an unadjusted, reported basis is confirmed by the cash flow. In fiscal 2014, the company’s cash flow slipped by 2.6 per cent, to $797 million.

On the positive side, Metro’s cash flow exceeded its needs: acquisitions of $100 million; net capital spending of $204 million; and dividends of $101 million. Excess cash flow of $392 million covered much of the net $453 million the company spent buying back its shares.

Metro’s net debt-to-cash-flow ratio is attractive. Subtract cash of $34 million from total debt of $1,059 million and you get net debt of $1,025 million. Divide this by the cash flow of $797 million and you find that the ratio is 1.3 times. This is well within our comfort zone of two times or less. Particularly since the company is geographically diversified and generates predictable, recurring cash flow.

Metro will keep raising your dividend

Metro’s excess cash flow and low debt will enable it to continue to reward you. The company is what’s known as a ‘dividend aristocrat’. That’s because it has raised its dividend each year since at least the early 1990s. Metro will want to keep this excellent record intact by continuing to raise your dividend each year.

As mentioned, Metro continues to buy back its shares. This will keep its earnings per share on the rise. That’s because the total earnings are divided by fewer shares, of course. Higher earnings per share, in turn, usually justify a higher share price.

Metro Inc. (TSX—MRU) remains a buy for long-term share price gains and rising dividends.

 

The Investment Reporter, MPL Communications Inc.
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