Attention, Investors: Buy Dollarama Inc. Before It’s Too Late

Dollarama Inc. (TSX:DOL) is on the cusp of a major long-term trend. Here’s how you can profit from it.

| More on:
The Motley Fool

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.

Dollarama is a great choice, but we’ve got three more stocks that might be even better!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Investing

Canadian Dollars
Stocks for Beginners

3 Stocks to Invest $30,000 in Right Now

Are you looking for some of the best stocks to invest in right now? Here's a trio that offer growth…

Read more »

Businessmen teamwork brainstorming meeting.
Dividend Stocks

1 Magnificent Dividend Stock Down 15% to Buy and Hold Forever

Enbridge is off the 12-month lows but still trades at a large discount to its 2022 high.

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

Missed Out on NVIDIA? My Best Growth Stock Pick to Buy and Hold

A TSX growth stock is a top pick and profitable investment choice if you missed out on the ascent of…

Read more »

Increasing yield
Dividend Stocks

My Top 5 Ultra-High-Yield Dividend Stocks to Buy in May

If you’re looking to build a passive-income stream, these five dividend stocks should be on your radar.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, May 24

The main TSX index seems on track to end the week in the red as it currently trades with 1.2%…

Read more »

consider the options
Bank Stocks

Is TD Bank Stock the Best Bank Stock for You?

TD Bank stock is reflecting a lot of the negative news. It remains a top bank stock trading at attractive…

Read more »

Payday ringed on a calendar
Dividend Stocks

A 10.6% Dividend Stock That Provides Monthly Cash Payments

A dividend stock with a mouth-watering yield providing monthly cash flow streams.

Read more »

Businessman holding AI cloud
Tech Stocks

Ready to Invest in Artificial Intelligence (AI)? 2 Stocks That Are Solid Bets

These two AI stocks provide investors with strong future opportunities as AI continues to become a part of our everyday…

Read more »