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.
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.
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.
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.