Alimentation Couche-Tard (TSX:ATD) stock tends to appreciate over time. Furthermore, its earnings are resilient, even in recessions — apparently, people shop for convenience, no matter how the economy is doing.
ATD year-to-date data by YCharts
In a general environment of higher interest rates, the global convenience store consolidator, which has many locations comprising roadside fuel retail, witnessed its adjusted earnings per share (EPS) jumping 29% last fiscal year. Consequently, the company also raised its common stock dividend at about 27%. Importantly, this is not a one-off.
Over the past decade, Alimentation Couche-Tard increased its adjusted earnings per share (EPS) and dividend per share by approximately 22% and 26%, respectively. Similarly, on a per-share basis, it increased its earnings before interest, taxes, depreciation, and amortization (EBITDA), a cash flow proxy, at a compound annual growth rate of about 19.8%. It has also achieved fabulous returns on equity of north of 20% every year since fiscal 2009.
As demonstrated by its strong track record of growth, Alimentation Couche-Tard is a very well-run company. It employs a mergers and acquisitions (M&A) strategy for growth. Since 1980, the company has expanded across Canada, into the United States and Europe, and even set foot in Asia — into Hong Kong and Macau — through the acquisition of Circle K in 2020. Management has stated that organic growth will play a bigger part, about 50%, in its growth going forward.
The growth stock is up close to 28% year to date, making it one of the best-performing Canadian stocks this year. It certainly beats the market. In fact, Couche-Tard has beat the market in the long run. Below is an illustration of its incredible wealth creation for long-term investors. Investors who bought $10,000 worth of shares 10 years ago would see their position at about $60,430 for a total return of 19.7% per year.
ATD and XIU 10-Year Total Return Level data by YCharts
Alimentation Couche-Tard generates durable cash flows to fund its capital investments and dividends. Management strategically allocates capital investments across network development, commercial programs, maintenance and improvements, and emerging business and innovation. For example, in fiscal 2023, its capital investments were 31% of its EBITDA, and its payout ratio was sustainable at approximately 16% of its free cash flow. Management continues to see M&A opportunities in Asia and the United States.
Wonderful businesses rarely go on sale. Today, Couche-Tard trades at a small discount, which makes it a decent buy, especially on dips. At the recent stock price of $76.02 per share, Couche-Tard trades at a price-to-earnings ratio of about 17.8, which is a good valuation for the proven stock. Analysts have a 12-month price target of $86 for the Canadian retail stock, representing a discount of almost 12%.
Couche-Tard’s dividend yield of about 0.9% is tiny, which is unappealing to investors who seek income in a higher interest rate environment. However, precisely, in a higher rate environment, Couche-Tard should fare well, as it has a low cost of debt and has the ability to generate strong cash flow and earnings. What investors miss in dividend income could come in the form of much stronger price appreciation instead. Its leverage ratio of about 1.5 is also at its historically low level, which could mean another meaningful acquisition may occur soon for long-term growth.
