Growth stocks can greatly boost the returns of your portfolio. The average market returns have historically been 10% with inflation included.
Between the end of August 2010 and 2016, Alimentation Couche Tard Inc.’s (TSX:ATD.B) average annualized rate of return was just over 44%, which equated to total returns of just shy of 800%. In that period dividends only contributed less than 1.5% of total returns.
Couche Tard is a leading convenience store operator in North America, Scandinavia, Ireland, and the Baltics. It has grown tremendously since it opened its first store in Quebec, Canada.
Couche Tard has a proven ability to integrate acquisitions. Since Circle K in 2003, it has integrated more than 5,900 stores from 52 acquisitions, including The Pantry and Topaz.
Its return on equity has been consistently in the double digits between 15% and 27% in the last decade. In the last five years, it has been consistently high between 21% and 27%.
Couche Tard’s proven ability to generate strong returns from shareholder equity has led to strong dividend growth in the past six years, in which the company grew its dividend per share at a compound annual growth rate of 26.3%. And it’s still paying out only about 10% of its earnings as dividends.
Six years may seem like a short dividend-growth history, but Couche Tard has actually maintained or grown its dividend since November 2005.
The Couche Tard and CST Brands merger is expected to close in early 2017 (subject to CST Brands shareholders’ approval, to customary regulatory approvals, and to closing conditions) and will add about 1,300 stores to the 7,888 North American stores Couche Tard had as of April.
CST Brands is a strong geographic and strategic fit for Couche Tard because CST Brands has a meaningful presence in Texas with more than 600 sites in the growing market. In addition, CST Brands has exposure to Georgia and Florida via its acquisition of FlashFoods. Furthermore, the deal will strengthen Couche Tard’s positions in Colorado, Arizona, Quebec, and Ontario.
The merger is expected to be accretive to earnings within the first year after closing, and 40-50 cents earnings per share accretion is anticipated within the third year after closing. This implies an accretion of 14.7-18.4% within three years after closing (based on the fiscal year 2016 earnings per share).
Swap current income for growth
You’ll notice that Couche Tard offers a small dividend yield compared to the typical companies one would buy for dividends, such as Royal Bank of Canada and BCE Inc.
However, due to Couche Tard’s high-growth track record, it has been increasing its dividend at a double-digit rate that more mature dividend-growth stocks such as Royal Bank and BCE can’t provide.
Essentially, by investing in Couche Tard, you’re trading current income for growth. That is, you expect most of your returns to come from price appreciation and your income stream to grow at a faster pace than average.
Despite being an excellent company to boost growth in a diversified portfolio, Couche Tard has had a price run-up since the announcement of the merger with CST. As a result, at a little over $66 per share, Couche Tard trades at a forward price-to-earnings ratio (P/E) of more than 21 and is fully valued.
Value-conscious investors should wait for a pullback to at least $62 for a maximum forward P/E of 19.8 or wait for some sideways price action, so earnings can catch up before investing.