Retail giant Canadian Tire (TSX:CTC.A) is among the most popular companies in the country. Valued at $7.9 billion by market cap, Canadian Tire stock has returned 192% to shareholders in the last 20 years. After adjusting for dividends, cumulative returns are much higher at 339%. Comparatively, the TSX index has surged over 380% since March 2004 after adjusting for dividends.
Down 37% from all-time highs, Canadian Tire has trailed the broader markets in the last three years. However, the pullback in share prices has driven the stock’s forward dividend yield to 5.2%, which is attractive. Let’s see if this beaten-down TSX dividend stock can beat the broader markets in 2024.
An overview of Canadian Tire
Canadian Tire is a group of companies that includes a retail segment, a financial services division, and CT REIT. Its retail business is led by Canadian Tire, which offers products across verticals such as automotive and gardening. Additionally, it also owns and operates Party City, PartSource, and Gas+.
The retail segment includes Mark’s, a leading source for casual and industrial wear, and Pro Hockey Life, a hockey specialty store. Canadian Tire has close to 1,700 retail and gasoline outlets in Canada and other international markets.
How did Canadian Tire perform in 2023?
In 2023, Canadian Tire’s retail consolidated full-year comparable sales fell 3.9% year over year to $18.5 billion due to a challenging macro environment. A decline in revenue led to lower earnings for the company in the fourth quarter (Q4), which meant its return on invested capital fell to 7.9% in 2023 compared to 12.5% in 2022.
A higher pricing environment and inflation caused CTC’s retail gross margin rate to narrow to 35.5% in 2023 from 35.6% in 2022.
However, CTC advanced its strategic objectives by focusing on loyalty capabilities that allowed it to drive engagement. For example, its Triangle Rewards loyalty program meant 11.4 million members actively shopped at CTC. Loyalty sales accounted for 40% of total sales, resulting in incremental sales of $253 million.
Canadian Tire expects its partnership with Petro-Canada to extend the Triangle Rewards program to a network of 1,800 gas stations all over the country.
In 2023, Canadian Tire spent $615.3 million towards operating capital expenditures, down from $747.6 million in the year-ago period. The decline in capital expenditures was attributed to delays in real estate projects and a slower pace of supply chain investments. Total capital expenditures fell to $683.4 million, compared to $848.7 million in 2022.
Is the dividend payout sustainable?
Canadian Tire pays shareholders an annual dividend of $7 per share, translating to a yield of more than 5%. In 2023, its annual dividend amounted to $360 million, indicating a payout ratio of less than 60%, given its free cash flow of $680 million.
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Canadian Tire has enough flexibility to raise dividends further. In the last 15 years, CTC has raised dividends by 15% annually, which is remarkable.
What’s next for Canadian Tire stock?
Canadian Tire expects the economic environment to remain challenging in 2024 and expects to deploy between $475 million and $525 million towards operating capex this year, below its previously disclosed range of $550 million and $600 million.
Analysts tracking the stock expect adjusted earnings to rise by 8% year over year to $11.2 per share. Priced at 12 times forward earnings, CTC stock is not very expensive and trades at a discount of 16% to consensus price target estimates.
