3 Compelling Reasons to Buy Loblaw Companies Limited

Loblaw Companies Limited (TSX:L) is a strong buy for three reasons. Is there a place for it in your portfolio?

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Loblaw Companies Limited (TSX:L), the largest owner and operator of grocery stores and pharmacies in Canada, has watched its stock post a very strong performance in 2015, rising more than 11.5% as the S&P/TSX Composite Index has fallen over 8%, and I think it will continue to outperform in both the short and long term. Let’s take a look at three of the primary reasons why I think this will happen and why you should buy the stock today.

1. Its strong financial results could support a higher stock price

On the morning of November 18, Loblaw released very strong earnings results for its 16- and 40-week periods ended on October 10, 2015. Here’s a summary of 10 of the most notable statistics from the first 40 weeks of fiscal 2015 compared with the first 40 weeks of fiscal 2014:

  1. Adjusted net earnings increased 29% to $1.06 billion
  2. Adjusted earnings per share increased 15.8% to $2.57
  3. Revenue increased 10.7% to $34.53 billion
  4. Excluding fuel sales and the negative impact of a change in distribution model by a tobacco supplier, food retail same-store sales increased 3.6%
  5. Drug retail same-store sales increased 4%
  6. Drug retail same-store pharmacy sales increased 3.6%
  7. Drug retail same-store front store sales increased 4.4%
  8. Adjusted earnings before interest, taxes, depreciation, and amortization increased 17.2% to $2.67 billion
  9. Cash flows from operating activities increased 55.5% to $2.52 billion
  10. Free cash flow increased 143.7% to $1.31 billion

2. It is a value play

At today’s levels, Loblaw’s stock trades at just 19.9 times fiscal 2015’s estimated earnings per share of $3.48 and only 17.3 times fiscal 2016’s estimated earnings per share of $4.00, both of which are very inexpensive compared with its five-year average price-to-earnings multiple of 159.3, its trailing 12-month multiple of 39.5, and its industry average multiple of 28.7.

With the multiples above and its estimated 14.1% long-term growth rate in mind, I think Loblaw’s stock could consistently trade at a fair multiple of at least 20, which would place its shares around $80 by the conclusion of fiscal 2016, representing upside of more than 15% from current levels.

3. It is a dividend-growth play

Loblaw pays a quarterly dividend of $0.25 per share, or $1.00 per share annually, which gives its stock a 1.4% yield. At first glance, this 1.4% yield is not impressive, but it is very important to note that the company has raised its dividend for four consecutive years, and its increased amount of free cash flow, including the aforementioned 143.7% year-over-year growth to $1.31 billion in the first 40 weeks of fiscal 2015, could allow this streak to continue in 2016. 

Is there a place for Loblaw in your portfolio?

Loblaw Companies Limited represents one of the best long-term investment opportunities in the market, so all Foolish investors should strongly consider beginning to scale in to positions today.

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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