Is Now the Right Time to Buy Dollarama Stock?

Dollarama stock trades at a fair valuation despite its market-thumping gains in the past decade. Is the TSX stock still a good buy?

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Investing in quality recession-resistant growth stocks should help you generate market-beating gains over time. One such TSX stock is Dollarama (TSX:DOL), which has returned over 650% to shareholders in the last decade, easily outpacing the broader index.

Valued at $29 billion by market cap, Dollarama stock trades at a reasonable multiple, making it a top investment choice right now. Let’s dive deeper.

An overview of Dollarama

Among the most recognizable brands in Canada, Dollarama is a discount retailer that offers a wide assortment of consumable products, general merchandise, and seasonal items. With 1,541 locations across the country, Dollarama provides customers with compelling value in metropolitan areas, mid-sized cities, and even small towns.

Moreover, the company owns a 50.1% interest in Dollarcity, a value retailer with a growing presence in Latin America. Dollarcity has 480 stores in Columbia, Peru. El Salvador, and Guatemala.

How did Dollarama perform in fiscal Q3 2024?

In fiscal Q3 2024 (which ended in October), Dollarama reported revenue of $1.5 billion, an increase of 14.6% year over year. Its comparable store sales rose over 11%, while EBITDA (earnings before interest, tax, depreciation, and amortization) growth was higher at 24%, or $478.8 million, indicating a margin of 32.4%.

Dollarama reported adjusted earnings of $0.92 per share, an increase of 31.4% year over year, as it opened 16 net new stores in the quarter. According to Dollarama, strong consumer demand across product lines drove double-digit same-store sales for the sixth consecutive quarter.

Its robust performance in Q3 reflects the strength of Dollarama’s business model amid a challenging macro environment. Dollarama also emphasized growth in the total number of stores in the last 12 months drove the top line in Q3. It ended Q3 with 1,541 stores, up from 1,462 stores in the year-ago period.

A growing dividend

In Q3 of fiscal 2024, Dollarama reported operating cash flow of $369.6 million, more than 100% higher than the year-ago period. The increase was attributed to higher net earnings, lower working capital requirements, and lower inventory purchases. Moreover, the retail giant allocated $129.9 million to capital expenditures as it purchased properties totaling $88.1 million in Mount Royal, Quebec.

Dollarama ended Q3 with free cash flow of $240 million. Right now, it pays shareholders a quarterly dividend of $0.07 per share, translating to a forward yield of 0.27%, which might not seem too high.

However, with a payout ratio of less than 10%, Dollarama has the flexibility to reinvest in growth projects, lower balance sheet debt, and target accretive acquisitions, all of which should drive future cash flows and dividends higher. In the last 10 years, Dollarama’s dividends have more than doubled from $0.03 per share in March 2015.

Is Dollarama stock undervalued?

Analysts tracking Dollarama stock expect adjusted earnings to expand from $2.76 per share in fiscal 2023 to $3.86 per share in fiscal 2025. Priced at 26.6 times forward earnings, Dollarama stock is not too expensive, given earnings are forecast to rise by 16.5% annually in the next five years.

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 Aditya Raghunath 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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