Dividend Analysis - George Weston Limited (TSE:WN)
23 November 2007Just to step away from my search for a dividend paying energy stock, I wanted to have a look at a traditionally defensive stock in Canada - George Weston Limited. This stock trades on the TSE and most people will know that it is the parent company of Loblaw (TSE:L).
I did analyze Loblaw (L) back on September 6, 2007. It has also traditionally been a defensive stock. But even back then I did not recommend it as a holding in our portfolio of superior dividend yielding stocks. Of course, that doesn’t bode well for WN. But I thought it would be an interesting exercise.
Company Profile:
From company site
George Weston Limited (“Weston” or the “Company”) is a Canadian public company founded in 1882 and through its operating subsidiaries constitutes one of North America’s largest food processing and distribution groups. Weston has two reportable operating segments: Weston Foods and Loblaw Companies Limited (“Loblaw”). Weston Foods is primarily engaged in the baking and dairy industries within North America. Loblaw is Canada’s largest food distributor and a leading provider of general merchandise, drugstore and financial products and services.
Market capitalization is $6.875B.
Company Fundamentals:
Let’s start off with a look at management’s performance. Over the last 10 years, management has delivered a fairly consistent return on invested capital typically fluctuating between 6% and 9%. However, the current ROIC is a mere 1.1%. And the 5 year average ROIC comes in at a sub par 5.2%. Definitely not a good trend.
Return on equity had been improving. The 10 year average ROE was 16.94%. The 5 year average ROE to 2006 had increased to 18. 43%. But once again, the current ROE comes in at a mere 2.3% and the 5 year average ROE to date is 11.1%.
Much of the fundamental data is up to 2006. So it doesn’t show the current pain that the company is experiencing. Although you can definitely see the trend.
The equity growth rate has been steadily sliding from a high of 37.84% in 1998 to the negative growth rates experienced in both 2004 and 2006. The 9 year rate is 9.75%. The 5 year rate falls to 4.04%. The 3 year rate continues to tank to 2.15%. And last year’s equity growth rate was -2.44%.
Earnings per share growth rate strangely did not follow this pattern. The 9 year rate is 13.34%. The 5 year rate dropped to 8.78%. The 3 year rate slid to 5.07%. But last year’s EPS growth rate came in at a whopping 20.81%!
And to explain all the down trends, here are the sales growth rates. The 9 year rate is 9.87%. The 5 year rate drops to 5.12%. The 3 year rate continues to drop to 3.48%. And last year’s rate came in even lower at 2.56%. They just aren’t generating sales.
These fundamentals are looking ugly.
Dividend Fundamentals:
The current dividend yield is 2.74%. That is better than the 2.43% dividend yield on the S&P/TSX Composite index. So I would consider this an average dividend yield.
The dividend growth rate history had been absolutely stupendous. Notice the ‘had been’. Increases in 9 of the 10 years. But there was a decrease of 25% in 2005. The 9 year dividend growth rate is an excellent 18.59%. The 5 year rate drops to 10.44%. The 3 year rate gets crushed at 2.63%. But last year’s rate experienced an increase of 33%.
Dividend payout ratio is quite low as it has been historically. In 2006, the dividend payout ratio was 21.02%.
Cash flow growth rates have remained relatively stable. The 9 year rate is 12.3%. The 5 year rate drops to 8.81%. The 3 year rate slips to 6.34%. And last year’s rate came in at 12.17%.
This company had been an excellent performer and you can see why it was considered a defensive stock. But between the company fundamentals and the hiccup in the dividend growth rate, I am concerned.
Valuation Models:
Let’s use our 3 models to determine a fair price.
For our average high dividend yield model, I looked at the last 10 years worth of dividend yield data. The 10 year average high dividend yield is 1.36%. The 5 year average high dividend yield increases to 1.51%. At the current 2.74% dividend yield, you can see that this stock is selling at a large discount. If I demand the 5 year yield, then the model price works out to $95.67. At the current price of $52.55, that is a discount of 45.07%!
Even Mr. Graham would agree that this stock is selling at a discount. The Graham number works out to $69.71 or a discount of 24.62%.
For my discounted present value model, I used the following inputs:
- future EPS growth rate of 4.04% (This is the 5 year equity growth rate. The analysts have forecast 4.66%. So I am in the right ballpark, but I’ll stick with my more conservative estimate.)
- future P/E of 7.80 (This is the current P/E and is at a historical low compared to the 10 year average P/E of 18.16 and the 5 year average P/E of 17.43. Talk about P/E compression! But of course, that goes with the future EPS growth rate.)
- dividend yield of 1.51%
- future dividend growth rate of 2.63% (Now, this one was very difficult to estimate. I used the 3 year dividend growth rate. And this takes into account the cut in 2005. I prefer to err on the side of caution.)
With this information, my model price works out to $22.40 or a premium of 134%!
Here is my dividend analysis of WN.
Here is the 1 year stock price chart:
Ouch. That is one nasty looking chart.
Conclusion:
It is easy to see why this stock has historically been one of the best defensive plays in Canada. But going forward, I believe that status is in jeopardy. Is this an opportunity to buy this company at a bargain price? I’m not so sure. I would have to sit back and wait for a turnaround first.
Although two of our model prices show a significant discount, the third model in fact determines that the stock is overpriced. This is one reason that I like to look at all 3 model prices as they take different data into account. The first two models don’t take into account the future prospects. They are 100% rear facing.
I personally would not add this stock to my portfolio of superior dividend yield stocks.
What are your thoughts?
Full Disclosure: I do not own shares in WN.
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on January 30th, 2008 at 1:13 am
[…] matter provides hard core data and analysis on dividend stocks. Here is an excerpt from “Dividend Analysis - George Weston Limited (TSE:WN)“, For my discounted present value model, I used the following […]
on January 30th, 2008 at 2:12 am
[…] matter provides hard core data and analysis on dividend stocks. Here is an excerpt from “Dividend Analysis - George Weston Limited (TSE:WN)“, For my discounted present value model, I used the following […]