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The Case to Buy Loblaw Companies Limited Today

Loblaw Companies Limited (TSX:L), the largest retailer in Canada, has watched its stock rise slowly in 2015, but it has the potential to one of the market’s top performers over the next several years. Let’s take a look at three of the top reasons why this could happen and why you should consider buying shares today.

1. Record earnings to support a higher stock price

On February 26, Loblaw released record earnings results for its fiscal year ended on December 31, 2014, but its stock has responded by falling about 2% in the weeks since. Here’s a breakdown of 10 of the most notable statistics and updates from the report compared to the year-ago period:

  1. Adjusted net income increased 75.9% to $1.22 billion
  2. Adjusted earnings per share increased 29.8% to $3.22
  3. Revenue increased 31.6% to $42.61 billion
  4. Same-store sales increased 2.0%
  5. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 53.7% to $3.24 billion
  6. Adjusted operating income increased 70.1% to $2.18 billion
  7. Cash flow from operating activities increased 72.3% to $2.57 billion
  8. Capital investments increased 23.8% to $1.09 billion
  9. Free cash flow increased 300.4% to $977 million
  10. Adjusted debt increased 59% to $10 billion

Loblaw’s very strong performance in fiscal 2014 can largely be attributed to its acquisition of Shoppers Drug Mart, which closed in March of 2014 and contributed $9.05 billion of revenue, or 88.4%, of its total revenue growth for the year.

2. Inexpensive forward valuations

At today’s levels, Loblaw’s stock trades at 19.6 times fiscal 2014’s adjusted earnings per share of $3.22, which seems fair, but it trades at just 18.3 times fiscal 2015’s estimated earnings per share of $3.46, and a mere 15.9 times fiscal 2016’s estimated earnings per share of $3.98, both of which are very inexpensive compared to its long-term growth potential.

I think Loblaw’s stock could consistently command a fair multiple of about 20, which would place its shares upwards of $69 by the conclusion of fiscal 2015 and upwards of $79.50 by the conclusion of fiscal 2016, representing upside of more than 9% and 14% respectively from current levels.

3. Dedicated to maximizing shareholder value

Loblaw pays a quarterly dividend of $0.245 per share, or $0.98 per share annually, which gives its stock a yield of about 1.6% at current levels. A 1.6% yield is not high by any means, but it is important to note that the company has raised its dividend for three consecutive years, and I think it could continue to do so for the next several years, because it generates ample free cash flow each quarter and year.

Should Loblaw be added to your portfolio today?

Loblaw Companies Limited is the largest retailer in Canada, and I think it represents one of the best long-term investment opportunities in the market today. It has the support of record earnings; its stock trades at inexpensive forward valuations; and it has shown a strong dedication to maximizing shareholder value through the payment of dividends. Foolish investors should take a closer look and strongly consider establishing positions today.

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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 Joseph Solitro has no position in any stocks mentioned.

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