Canadian Tire Stock Has Rallied 20%: Is it a Buy Today?

Undervalued Canadian Tire stock may be a buy for investors. It has a solid track record of earnings growth and healthy dividend increases.

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Canadian Tire (TSX:CTC.A) stock has climbed about 20% year to date. That’s a big rally compared to the 10-year Canadian stock market return of about 8.8% as a reference. Is it a buy today?

First, let’s explore potential reasons the stock is up so much.

Valuation expansion

The stock of the specialty retailer was down 22% last year. At the end of 2022, it traded at a low valuation of about 7.6 times adjusted earnings at about $140 per share. It’s natural that investors would bid up a solid stock when it trades too cheaply.

For reference, Canadian Tire increased its adjusted earnings per share at a compound annual growth rate (CAGR) of about 11.6% over the past 10 years. And its long-term normal valuation is about 12.7 times adjusted earnings. At $169 and change per share, the retail stock trades at a multiple of 9.1. This implies the stock trades at a discount of about 28%.

Some recent news that could be the latest contributors to this rally include its continued partnership with Petco and releasing stable earnings results for 2022.

Continued Petco partnership

In the middle of this month, Canadian Tire “announced its continued expansion of Petco shop-in-shops across the country through its exclusive partnership with Petco Health and Wellness.” The press release explained, “this investment enables CTC to further tap into Canada’s $5.3 billion pet market… Petco shop-in-shops are now featured in over 80% of Canadian Tire stores and are planned to grow to 90% by this summer.”

Since 60% of Canadian households are home to a family cat or dog, this partnership can help drive repeat foot traffic to Canadian Tire stores. “Since partnering with Petco in 2018, we have seen double-digit growth in this category with a marked increase in customers shopping the pet category for the first time.”

Stable 2022 results

For the fourth quarter (Q4) of 2022, Canadian Tire saw retail revenue growing 3.3% year over year. Excluding petroleum, the revenue growth was 2.3%. Normalized diluted earnings per share (EPS) climbed 11% versus Q4 2021.

For the full-year 2022, the Canadian retailer’s normalized diluted EPS marginally declined by less than 1%. Last year, the company witnessed massive increase in EPS. Putting it in perspective, its EPS increased it a CAGR of almost 12% over the past five years.

Persistent dividend growth

Another aspect that keeps investors to the stock is its persistent dividend growth. Management appears committed to paying a growing dividend. The Canadian retail stock has increased its dividend for 12 consecutive years with a 10-year dividend-growth rate of 17.2%. Its last dividend hike of 6.2% was in December. Its 2022 payout ratio was sustainable at about 31%. So, investors can expect more healthy dividend increases in the future.

Investor takeaway

Canadian Tire is a retailer will solid long-term results. It has an investment-grade S&P credit rating of BBB. Given that the dividend stock trades at a discount and offers a growing dividend that currently yields close to 4.1%, it’s a good buy. That said, after the recent rally, it might experience a pullback on profit-taking, which should be seen as a stronger buying opportunity for long-term investors.

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 of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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