Investing in stocks is never a sure thing because you’re more or less taking risks when investing in a business. However, if you apply the tips below, your portfolio should make money for you as a whole in the long run.
I’ll use Alimentation Couche Tard Inc. (TSX:ATD.B) as an example.
Buy businesses that tend to profit year after year
Couche Tard has been profitable every year for the last 15 years. In that period, it only had one year in which earnings declined. And that was in fiscal 2008, during the last recession, when many businesses were having trouble. Couche Tard showed how strong a business it is when its earnings more than recovered in the subsequent year.
The company is a leading global convenience store operator and road transportation fuel retailer. It has operations in Canada, the U.S., the Scandinavian countries, and the Baltic countries. It also has licensed stores in other parts of the world, such as Indonesia, Hong Kong, Vietnam, and China.
One way Couche Tard has been boosting its growth is making acquisitions and extracting synergies from them. As a result, the company’s return on equity has been high in the last decade. In the last five years, its return on equity has been 21-27%.
At the end of June, Couche Tard completed its acquisition of CST Brands, which will essentially add 1,263 sites and a significant presence in Texas, the southeastern U.S., the state of New York, and eastern Canada to the Couche Tard network.
Last fiscal year, Couche Tard generated US$1.2 billion of net income and US$931 million of free cash flow.
Buy stocks that grow their dividends
Couche Tard shares its profits with it shareholders via a growing dividend. Although its dividend yield of ~0.6% is puny, it has been hiking its dividend at a high pace. In the last five years, the company has increased the dividend at a rate of 31.6%!
The company has increased its dividend for seven consecutive years. With a recent payout ratio of ~13% and its track record of dividend growth, there’s reason to believe Couche Tard will continue growing its payout.
Don’t overpay
Watch the valuation you’re paying. Fourteen analysts estimate Couche Tard will grow its earnings per share by ~13.8% every year for the next three to five years. At ~$59 per share, Couche Tard trades at a multiple of ~20. So, the shares are undervalued.
Investor takeaway
You can’t really go wrong with buying a portfolio of businesses that tend to increase their profitability and cash flow generation over time, especially if you watch the multiple you pay for the shares. Any dividends that you receive will only increase your returns. In the long run, you can consistently make money this way.
