It’s great to invest in Tax-Free Savings Accounts (TFSAs) because what’s earned inside is tax-free. Although interest income is taxed at a higher rate than income in the forms of capital gains or dividends in non-registered accounts, over the long term, it makes better sense to hold quality stocks in an investor’s TFSAs given he or she can take on higher risk.
Why? Stocks tend to outperform other types of investments in the long run.
Currently, Alimentation Couche Tard Inc. (TSX:ATD.B) is the second-largest holding in my TFSA. I started buying the stock last year.
How has it performed so far?
I bought Couche Tard for its above-average growth. Nearly a year after my first purchase, Couche Tard has met some of my expectations. It has increased its dividend per share by 33%, which is abnormally high for a Canadian stock.
From my average cost basis, the shares have appreciated about 6%. I originally expected the shares to experience more growth than this.
Recent developments
Couche Tard has been an excellent operator and consolidator in the fragmented convenience store industry. It has a proven track record of highly disciplined growth — growing at a double-digit rate, while keeping its financial leverage in check and maintaining an investment-grade balance sheet.
Many things have been happening at Couche Tard. In the most recent fiscal quarter, the company reached its 24-month synergy objectives for The Pantry acquisition, and it expects to surpass those objectives.
As well, Couche Tard successfully integrated 278 sites acquired from the Imperial Oil acquisition into its network in Ontario and Quebec. The company has also continued to convert its North American and European stores to the global banner Circle K.
Going forward
Couche Tard has maintained a return on equity of at least 20% since fiscal 2010 while its number of outstanding shares has remained essentially the same, which indicates Couche Tard is a great capital allocator. In the most recent fiscal quarter, its return on equity was 22.6%.
Moreover, Couche Tard expects to close the CST Brands acquisition sometime between April and September 2018. Like in previous acquisitions, Couche Tard will likely identify synergies and the best practices the company can benefit from.
With a payout ratio of about 10% and estimated double-digit earnings growth, Couche Tard has the room to continue growing its dividend at a double-digit rate. As well, the growth should also reflect in its share price sooner or later.
Investor takeaway
Since the summer of 2015, Couche Tard shares have consolidated sideways with a midpoint of roughly $60 per share. At about $61.40 per share, it trades at a forward multiple of about 18, which represents a discount for a stock that’s expected to grow its earnings per share by 11.5-14.6% for the next three to five years.
The analyst at Bank of Nova Scotia has a one-year price target of $76 on the stock, which represents upside potential of nearly 24%. Now is a good time to buy some Couche Tard shares. Any further dips would make it a stronger buy.
