Is Canadian Tire Corporation Limited a Bargain Today?

Is the 11% dip in Canadian Tire Corporation Limited (TSX:CTC.A) a buying opportunity? What kind of returns can you expect?

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Canadian Tire Corporation Limited (TSX:CTC.A) has declined 11% from its 52-week high of $147 per share to below $131 per share. Looking at the price decline alone, it’s impossible to tell if it’s a bargain or not.

Let’s first see if Canadian Tire is the kind of business you want to own.

The business

Canadian Tire has a leading position in offering general merchandise to Canadians. The company’s nearly 1,700 retail outlets and gas bars are strategically located such that they’re within 15 minutes’ reach of 90% of Canadians.

You’ll recognize one or more Canadian Tire’s retail banners, including Canadian Tire, PartSource, Petroleum, Mark’s and FGL Sports, which has an umbrella of brands: Sport Chek, Sports Experts, Atmosphere and Pro Hockey Life Sporting Goods.

Additionally, Canadian Tire has an 85% interest in CT REIT, which owns more than 300 properties comprising nearly 23 million square feet and offers a juicy +4% yield. On top of that, Canadian Tire offers a range of financial products and services.

Recent results

In the first half of 2016, Canadian Tire earned nearly 39% of its before-tax income from its retail segment, 24% from its CT REIT segment, and almost 37% from its financial services segment. Compared with the first half of 2015, Canadian Tire experienced 12.3% growth in its retail segment, 7.7% growth in its CT REIT segment, and 7.5% decline in its financial services segment.

In the second quarter, Canadian Tire had same-store sales growth in all of its banners: 2.9% at Canadian Tire, 4.6% in Mark’s, and 5.8% at FGL Sports.

Its second-quarter retail sales growth showed similar growth: 4.2% at Canadian Tire, 4.4% at Mark’s, and 5.7% at FGL Sports.


Canadian Tire encourages long-term investment. It has paid a growing dividend for the seventh consecutive year. In the past five years, the dividend growth compounded at a spectacular rate of 18.9% per year.

The side effect is that the payout ratio expanded from 20% to 25%. Yet Canadian Tire’s 2016 payout ratio is expected to be below 26%. This is a low payout ratio compared to its peers Target and Wal-Mart, which pay out more than 40% their earnings.

With bottom-line growth estimated to be 8-10% per year and a low payout ratio, Canadian Tire’s dividend yield of 1.8% is safe and has room to grow.

Going forward

Through 2017 management will continue to execute its strategic imperatives. These include strengthening its brands, enhancing customer experiences, transitioning to omni-retail, and using technology to complement brick-and-mortar stores, driving growth and productivity in its core businesses and creating an agile corporate culture.

Overall, management expects average earnings-per-share growth to be 8-10% per year.


After its share price declined 11%, Canadian Tire trades at a forward multiple of 14.5 at about $130.50 per share. It trades at a fair valuation given the quality of the business and management’s expectation to grow earnings per share by 8-10% a year. An investor making an investment today can expect total returns of about 15%.

That said, if Canadian Tire fell 8-17% to $108-120 per share for a maximum multiple of 13.3, it would be a good opportunity to buy the quality shares at a discount. Such an investment would result in total returns of 25-38%.

Investors need to decide if they’d rather invest in the lower price range for a greater margin of safety and higher potential returns.

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 Kay Ng has no position in any stocks mentioned.

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