Because Loblaw (TSX: L) has a small dividend yield, investors might have largely ignored the grocery chain as an investment. However, the Canadian retail stock has actually beaten the market significantly since 2012.
The blue-chip stock has maintained or increased its common stock dividend for at least 20 consecutive years. Since 2012, it has even raised its dividend every year. So, it’s proudly a Canadian Dividend Aristocrat. For your reference, its three-, five-, and 10-year dividend-growth rates are 8.4%, 8.1%, and 6.4%, respectively. Last year, it was able to hike its dividend at an outsized rate of 12.9%, likely because of higher inflation. This year’s dividend hike was not bad either at 10.1%.
Since 2012, with dividend reinvestment, the dividend stock delivered a compound annual rate of return of about 14.6% per year, transforming an initial investment of $10,000 into about $48,028. This beat the Canadian stock market return of about 8.3% per year in the period (a final balance of $25,038) by a wide margin, using iShares S&P/TSX 60 Index ETF as a proxy.
Loblaw’s acquisition of Shoppers Drug Mart in 2013 has helped contribute to overall stable growth. Additionally, the recent inflationary price pressures have led to higher revenues and earnings last year.
Grocery stores are a low-margin, high-volume business. In 2022, the company generated $56.5 billion of revenues. The gross profit margin was 31.8%. The operating margin was 5.9%. And the net margin was just under 3.4%. While its revenue climbed 6.3% in 2022, management was able to keep costs under control, with the operating expense rising less than 6.1%.
From 2012 to 2022, Loblaw increased its adjusted earnings per share by approximately 9.5% per year, which is pretty good. Investors should note that some of its returns were attributable to valuation expansion. Particularly, its price-to-earnings ratio (based on adjusted earnings per share) expanded from about 10.2 to 16.6.
Loblaw’s five-year return on assets (ROA) and return on equity (ROE) are about 3.7% and 11.7%, respectively, which could use some improvement. Indeed, its trailing 12-month ROA and ROE of about 5.1% and 16.5% were better.
What if you invested $10,000 into Loblaw stock today?
Loblaw’s payout ratio is sustainable at approximately 22% of adjusted earnings this year. Its dividend yield is only about 1.5%. So, investors should focus on price appreciation in the stock. Over the next few years, it’s expected to continue growing its adjusted earnings per share by 10-13% per year.
The stock is also slightly discounted. Currently, the analyst consensus 12-month price target, as shown on Yahoo Finance, is $140.72, which represents a discount of almost 15% at $119.87 per share at writing. Letâs be conservative and assume earnings growth of 10% per year over the next three years; that would imply a price target of $187.30. Combined with the dividend yield of 1.5% suggests an estimated annualized return of approximately 17.5% (so a $10,000 initial investment turning into $16,222), which would be quite good.
If it instead took five years to achieve that medium-term price target, the annualized return would be 10.8% per year, which would still be not bad for a defensive consumer staples stock in a diversified portfolio.
