In the past week, Empire Company Limited (TSX:EMP.A) reported quarterly earnings. While this was the first quarterly earnings for new president and CEO Michael Medline, long-term investors have had their share of bad news from the company.
Over the past year, shares declined from $22 to under $16; two years ago, shares were $30. The good news for investors has been the sustainability of the dividend.
The yield of the shares reached a mark in excess of 2.5%, making the investment somewhat attractive to income investors. The caveat, of course, is that the investment is dependent on things turning around for the company.
Looking at the results from the third quarter of fiscal 2017, the good news is, year over year, the decrease in revenues and earnings has been minor. Revenues for the quarter declined 2.3%, and operating income after backing out the one-time expenses declined over 50%. Clearly, that’s a big number, but for a grocery store, reaching a critical economy of scale is the pinnacle of importance.
Looking at the results over the first three quarters, revenues declined only 1.8% with operating income declining 42.5% again after backing out the one-time expenses. Clearly, the third quarter was a difficult one, but with the company continuing to deliver a positive bottom line during a major downturn in the oil sector, things may begin turning the corner sooner than we think.
As Empire pays dividends which cost approximately $28 million on a quarterly basis, the cash flow from operations in the amount of $100 million is more than enough to cover the dividend. Earnings totaled $28.4 million for the difficult third quarter.
After earnings were released, shares of Empire climbed on both Thursday and Friday. Clearly, investors believe the company is doing well enough to be able to turn the corner once western Canada booms again.
On Friday, shares rose to above $18.50, breaking away from the 10-day and 50-day simple moving average (SMA), while staying shy of the 200-day SMA. With a 200-day SMA slightly under $19 per share, the resistance will come shortly. For investors looking for a security with a potential breakout and relatively defensive profile, shares of Empire may be the winner.
Currently, shares offer new investors a yield close to 2.2%; the yield has shown some upwards momentum in the past three months. While the dividend is nothing too exciting at this point, the 2.2% yield offers investors more than the other major Canadian grocers. The question will be how the dividend or share-buyback program will aim to return capital to shareholders in the future.
Over the past year, a very small share-buyback program was implemented, and the dividend was not increased. Instead, long-term debt was reduced and the balance sheet improved.
With management seemingly keeping the eye on the bottom line, shares of Empire may have a lot to offer investors over the next year.
