Even though stock markets have been relatively calm over the last couple of weeks, many pundits are saying that volatility could be here to stay, at least for a little while. There are all sorts of headwinds slowing growth of the world economy. China continues to post weak economic data — at least, for it. Japan has been weak as well, even after its central bank embarked on a massive effort to introduce inflation into the domestic economy. Europe continues to teeter at the edge of yet another recession. Even Canada is looking vulnerable, thanks to weaker commodity prices and the…
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Even though stock markets have been relatively calm over the last couple of weeks, many pundits are saying that volatility could be here to stay, at least for a little while.
There are all sorts of headwinds slowing growth of the world economy. China continues to post weak economic data — at least, for it. Japan has been weak as well, even after its central bank embarked on a massive effort to introduce inflation into the domestic economy. Europe continues to teeter at the edge of yet another recession. Even Canada is looking vulnerable, thanks to weaker commodity prices and the risk of our real estate market imploding.
Investors have reacted to this the same way they react every time the market starts to turn sour. Capital is rotated from riskier names into sectors like utilities, real estate investment trusts, and consumer staples. After all, things have to get pretty bad before you start not buying groceries or paying the power bill.
Because of this, shares in Dollarama Inc. (TSX: DOL), Canada’s largest chain of dollar stores, have done quite well lately. Over the last three months, the company’s shares have outperformed the TSX Composite by more than 17%, rising more than 11.6% while the index has fallen 6.4%.
But unlike some of its competitors, Dollarama actually stands to benefit more if Canada’s economic future turns less rosy. Customers trying to pinch pennies will be more inclined to try some of Dollarama’s lower-priced food options, as well as buying household supplies there. Going to a cheaper store to buy the same things as normal is a pretty painless way to save a little cash.
Plus, investors just need to look south for an indication of how big dollar stores can become in Canada. Based on U.S. penetration, an analyst report earlier this year estimated that Canada has room for an additional 1,700 dollar stores over the long term, with 400-700 being a more realistic target over the next five to 10 years. Currently, Dollarama has about 900 stores, giving it the potential to increase store count by an additional 50% by the early 2020s.
Even today, the company is still growing strong. Recent quarterly results saw improvements in every major metric. Same-store sales were up 4.2%, which is especially impressive considering the tepid results of the company’s competitors. Total sales grew 12%, while operating income grew 17.2%. Net earnings increased more than 25%, from $0.82 per share last year to $1.03 per share in 2014. This is the kind of growth you want in your portfolio.
Analysts are bullish about the future, with expectations that 2015 earnings will increase to $4.32 per share. 2016 is projected to be even better, with earnings expected to top $5 per share. 5 out of 6 analysts covering the stock also rate it a buy, with price targets as high as $110.
Even while opening up 50-100 new stores per year, management continues to reward shareholders. The stock’s current yield is just 0.64%, but the company has raised its dividend on an annual basis since 2011. And since the payout ratio is under 20% of net earnings, look for dividends to continue increasing in the future. Additionally, the company has been buying back shares, reducing the share count by 8% since last August.
But the best part? Dollarama comes with a built-in competitive advantage. It’s so entrenched that nobody can knock it off its pedestal. It’s so dominant that Canada’s largest food brands are making unique products that retail under Dollarama’s $3 maximum price point. Plus, even despite its low prices, it enjoys margins that are among the best in its industry.
Dollarama is a great company. Shares might look a little expensive, but investors have to remember that an investment in the company is an investment in the best the sector has to offer. Paying a premium today probably won’t look so bad a few years from now.
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Fool contributor Nelson Smith has no position in any stocks mentioned.