Reader Request - Reitmans Limited Class A (TSE:RET-A)
22 August 2007Dividends Matter reader Frank has requested that we have a look at Reitmans Limited which trades on the TSE under the symbol RET-A. His analysis shows that it is currently a good value. Let’s put this stock through our paces and see if it deserves a place in our portfolio of superior dividend yielding stocks.
Company Profile:
Reitmans is a Canadian ladieswear specialty apparel retailer. The Company operates under seven banners: Reitmans, Smart Set, RW&CO., Thyme Maternity, Penningtons, Addition Elle and its newest banner, Cassis. Each banner is focused on a particular niche in the retail market place.
Market capitalization is $1.3B.
Company Fundamentals:
Return on invested capital has been increasing steadily over the last 10 years. From single digit ROIC in the early 1990s to the 18% to 20% range over the last 3 years. The 5 year average ROIC is 15.7%. I definitely like the fact that the ROIC has been trending upwards.
The return on equity shows the exact same trend. With ROE in the 9% range at the beginning of the 10 year period, management is now delivering 21% to 23% ROE over the last few years. The 10 year average ROE is 14.22% and the 5 year average ROE increases to 17.89%.
Equity growth rate has been quite steady. The 9 year average rate is 13.06%. The 5 year rate is slightly higher at 14.17%. The 3 year rate comes in at 15.27%. Last year’s rate came in at 10.07%. Steady, consistent equity growth over the last decade.
Earnings per share growth rate has been phenomenal and seriously out paces the equity growth rate. The 9 year rate is 26.09%. The 5 year rate increases to 35%. The 3 year rate stays close at 33% and last year’s EPS growth rate dipped to 20.17%.
Now, sales growth rates have been trending downwards. The 9 year rate is 11.95%. It remains steady over 5 years at 11.73%. However, the 3 year rate drops to 6.9% and last year’s sales growth rate was 7.56%.
It is interesting to see how EPS growth rate has seriously out paced the equity growth rate. And interesting that both these rates have been mostly increasing while sales growth rates have decreased.
Dividend Fundamentals:
The current dividend yield is 2.90%. The S&P/TSX Composite Index has a dividend yield of 2.57%. Since I use the index as a gauge, I would say that this dividend yield is average.
Now, the dividend growth rate has been anything but average! But also very inconsistent. There were 3 separate years where there was no dividend growth at all. But the last 3 years have been out of this world. The 3 year dividend growth rate is an astounding 76.91%! Over 5 years, it is still a whopping 47.98%. And even the 9 year dividend growth rate comes in at 25.71%! But most of this dividend growth has been concentrated during the last 3 years where there were increases of 86%, 104% and 38%.
Obviously, with those huge dividend increases over the last few years, the dividend payout ratio has climbed - but not as high as you may think. In 2003, the payout ratio was 18.49%. It has climbed to 40.56% as of last year. But interestingly enough, the dividend payout ratio was 36.52% back in 1997! So in fact, the dividend payout ratio is basically back to where it used to be.
And cash flow growth rates have remained solid over the 10 year period. The 9 year rate is 23.27%. The 5 year rate is 28.55% and the 3 year rate is 25.25%.
Valuation Models:
Let’s use our 3 valuation techniques to determine a model price.
We first start with an analysis of the dividend yield. The 10 year average high dividend yield is 3.73%. The 5 year average high dividend yield is 3.23%. If, as investors, we demand the 5 year yield, then our model price works out to $ 19.81. At the current price of $22.09, Mr. Market is demanding a premium of 11.49%.
Mr. Graham would argue that Mr. Market is much more euphoric than that! The Graham number works out to $13.88 which implies a premium of 59%.
For the discounted present value method, I used the following inputs:
- future EPS growth rate of 13.06% (derived from the 9 year equity growth rate. Unfortunately, I was not able to find an analyst forecast to compare my estimate with.)
- future P/E of 10.71 (the 10 year average P/E which is much more conservative than the current P/E of 15.78).
- dividend yield of 3.23% (the 5 year average high dividend yield)
- future dividend growth rate of 25.71% (this is the most conservative dividend growth rate over the 10 year period!)
With this information, my model price works out to $35.83. That means a discount of 38%. But I have real doubts that the dividend can continue to grow at that historical pace of 25%. Lowering that dividend growth rate significantly decreases the model price.
Here are my RETA calculations.
Here is the 1 year stock price chart:
Conclusion:
This has been an interesting analysis. Although the dividend growth rate has been superb over the 10 year period, it had been very erratic. Yes, the last 3 years of dividend growth has been absolutely amazing. But there is no way that that type of dividend growth can be maintained. I definitely prefer to see a steady, measured dividend growth rate as opposed to a few massive increases. It gives me the sense that management is committed to increasing dividends no matter what the market conditions.
For some reason, this one just doesn’t jump out at me. And because of that, I would not include it in a portfolio of superior dividend yielding stocks.
What are your thoughts on this stock?
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on August 22nd, 2007 at 12:41 pm
Thanks for the evaluation average_joe - I had the same feeling about this stock, but it’s great to see the hard numbers from your calculations, as well as your excellent analysis.
on August 22nd, 2007 at 7:15 pm
I like Reitman’s but it never seems to get cheap enough for me. I think the company has a great future, and their past has been great. It’s a good way to diversify away from banks and resources in Canada while collecting the div. tax credit.
on August 23rd, 2007 at 7:07 am
“Yes, the last 3 years of dividend growth has been absoluely amazing. But there is no way that that type of dividend growth can be maintained.”
You might want to try an identify what happened three years ago and compare it to 1997. It’ll give you some insight into possible future dividend growth. It’s easy to cruch numbers; the hard part is understanding the company. You need to look at Annual Reports (not just the financial statement portion although understanding cost of goods sold is illuminating). Sorry for being cryptic but there’s more to RET.A than number crunching.
Disclosure: I have a position. This is not a recommendation to buy. People should do their own research and make their own decisions, ie, I’m not responsible for what you do.
on August 23rd, 2007 at 9:09 pm
Stop teasing us Yielder! What would we find that could possibly allow Reitmans to continue to grow their dividend at the current pace?
Any insight would be greatly appreciated.