Reader Request - Loblaw Companies Ltd (TSE:L)
6 September 2007Dividends Matter reader Frank has requested that we have a look at Loblaw Companies Ltd which trades on the TSE under the symbol L. Frank feels that with the new lows that Loblaws is reaching, this could very well be a powerhouse.
Let’s put this stock through our paces and see if it deserves a spot in our portfolio of superior dividend yielding stocks.
Company Profile:
From Reuters
Loblaw Companies Limited (Loblaw) is a Canada-based food distributor and provider of general merchandise products, drugstore, and financial products and services. Through its various operating banners, including 672 corporate stores and 405 franchised stores, Loblaw provides a one-stop destination in meeting food and everyday household needs. The Company-owned store banners include Atlantic Superstore, Dominion (in Newfoundland and Labrador), Extra Foods, Loblaws, Maxi, Maxi & Cie, Provigo, The Real Canadian Superstore and Zehrs, and wholesale outlets operating as Cash & Carry, Presto and The Real Canadian Wholesale Club. Loblaw’s franchised and associated stores operate under the trade names Atlantic SaveEasy, Fortinos, no frills, SuperValu, Valu-mart and Your Independent Grocer. In addition, Loblaw makes available to consumers President’s Choice Financial services and products; home, travel and pet insurance; PC Mobile phone service, as well as a loyalty program known as PC points.
Market capitalization is $12.5B.
Company Fundamentals:
Starting with management’s performance, I can see a decline in the recent return on invested capital numbers. I only have the last 5 years worth of ROIC, but even that short amount of time shows a decrease from the typical 10% ROIC achieved by management and declining to 8.3% in 2005 and further declining to 6.5% in 2006.
This decline does not show up in the return on equity averages. The 10 year ROE is 14.91% and the 5 year rate is 15.92%. But it clearly has dropped from the 17% that was consistently achieved from 2002 - 2004 and sits at 12.4% as of last year.
Equity growth rates have also been on the decline. The 9 year rate is a healthy 13.52%. The 5 year rate drops to 10.11%. But now the real declines from the last 2 years really set in with the 3 year rate at 5.24% and last year’s equity growth rate of -7.6%.
Earnings per share growth rate has suffered more than the equity growth rate. The 9 year rate is 15.16%. The 5 year rates plummets to 4.44%. The 3 year rate goes negative at -7.83%. And last year’s rate comes in at -18.54%. Ouch.
Sales growth rates clearly show the decline as well as they drop from 10.6% over the 10 year period to last year’s 3.02%.
Fundamentals have been heading down, down, down over the last couple of years.
Dividend Fundamentals:
The current dividend yield is 1.86%. I consider that below average considering that the S&P/TSX Composite Index produces a dividend yield of 2.49%.
Like all the other growth rates, the dividend growth rate has not escaped the decline over the last 2 years. The 9 year rate is an amazing 22.55%. The 5 year rate drops to 17.43%. The 3 year rate drops further to 11.73%. And last year’s dividend growth rate? Zero!
The dividend payout ratio has increased dramatically over the last couple of years from 19.54% in 2003 to last year’s dividend payout ratio of 34.15%. Still fairly conservative.
Cash flow growth rates have sunk over the last couple of years into the negative territory with growth rates of -3.6% and -8.96% respectively.
Valuation Models:
Let’s use my 3 methods for determining a fair price for this stock.
From a dividend yield perspective, Loblaw’s is currently at an all time high. The 10 year average high dividend yield is 1.15%. The 5 year average high dividend yield is 1.38%. Now, this yield is a tad on the low side considering that the high yields achieved over the last couple of years has been 1.59% and 1.87%. So I would in fact consider its current 1.86% as a fair dividend yield.
Calculating the Graham number, I came up with $31.63. At the current price of $45.15, that is a premium of 42.76%. Pretty hefty premium for a company that has been struggling of late.
For my discounted present value method, I used the following inputs:
- future P/E of 20.16 (current P/E)
- future EPS growth rate of 10.11% (the 5 year equity growth rate. But considering the performance over the last 2 years, I have my doubts. Unfortunately, I was not able to find a forecast from an analyst.)
- dividend yield of 1.38%
- dividend growth rate of 0% (Unfortunately, the last 2 years have broken the dividend growth trend which makes it difficult to estimate the future.)
With this information, my model price worked out to $32.98 which means a premium of 36.89%.
Here is my dividend analysis of L.
Here is the 1 year stock price chart:
Conclusion:
Is this stock worth adding to our portfolio of superior dividend yield stocks? I would have to argue no. All the growth rates have plummeted from their usual highs. Management even decided to not continue their culture of regular dividend increases.
Many of Loblaw’s issues with their supply chain as well as the competition from the Wal-Mart super stores has been highly publicized. Is this a chance to purchase a historically solid performer while it is beaten down? Possibly. It was difficult calculating a model price as the previous trend has been broken.
I would pass on this stock as a dividend payer. There are stocks with higher dividend yields and more consistent dividend growth rates than Loblaw’s.
Full Disclosure: I do not own shares in L.
Popularity: 15%
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