Investing in undervalued growth stocks that also pay shareholders a dividend is a proven strategy to generate inflation-beating gains. In addition to a regular dividend payout, investors are positioned to benefit from capital gains over time.
Moreover, if these dividend growth stocks are held in a TFSA (Tax-Free Savings Account), any returns in the form of dividends or capital gains are exempt from Canada Revenue Agency taxes.
The TFSA contribution room has increased to $7,000 in 2024. Let’s see how these two TSX dividend stocks can help turn a $7,000 TFSA investment into $20,000 by 2030.
Ag Growth International stock
Valued at $1.2 billion by market cap, Ag Growth International (TSX: AFN) provides equipment and solutions for food storage, transport, and processing. AGI has manufacturing facilities in Canada, the U.S., Brazil, France, Italy, and India, allowing it to distribute its products globally.
Despite a challenging macro backdrop, AGI increased sales by 5% year over year to $1.5 billion in 2023. International sales grew to $500 million in the last year, accounting for 34% of total revenue. A focus on operational efficiency allowed the company to grow adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 25% as margins improved by 320 basis points to 19.3%.
Ag Growth International expects adjusted EBITDA to expand to $310 million in 2024, up from $294 million in 2023, as it ended the last year with an order book of $747 million.
AGI emphasized its EBITDA margins touched multi-year highs in 2023 ever since its strategic initiative to enter the commercial and international businesses 10 years back. An improving bottom line also allowed AGI to strengthen its balance sheet. Its net debt leverage narrowed to 2.8 times in 2023, compared to 3.7 times in the year-ago period. AGI aims to end 2024 with a net debt leverage ratio of 2.5 times.
AGI pays shareholders a quarterly dividend of $0.15 per share, translating to a forward yield of 1%. Priced at 10 times forward earnings, AGI stock is really cheap, given earnings are forecast to rise by 10% annually in the next five years. Analysts remain bullish on the TSX stock and expect it to surge over 30% in the next 12 months.
Pet Valu stock
Pet Valu (TSX: PET) operates in the pet retail space and is valued at $2.3 billion by market cap. Its system-wide sales in Q4 2023 rose by 5.1% year over year to $379 million, while same-store sales growth stood at 1.9% due to higher average spending per transaction.
Pet Valu grew sales by 7.8% year over year to $286.9 million in the December quarter. Comparatively, adjusted EBITDA rose 20.2% to $71.3 million, while net income surged 25.6% to $0.54 per share.
Pet Valu opened 17 new stores in Q4, ending the year with 783 stores across the network. The company’s growth story is far from over, given it forecast revenue between $1.1 billion and $1.1 billion in 2024, as it expects to open 40 to 50 new stores this year. Pet Valu expects adjusted earnings of $1.60 per share, valuing it at 19.8 times forward earnings, which is reasonable.
Pet Valu pays shareholders a quarterly dividend of $0.11 per share, indicating a yield of 1.4%. In Q4, its free cash flow stood at $34.3 million, and it paid less than $8 million in dividends, suggesting a payout ratio of less than 25%, which is sustainable. Further, these payouts have almost doubled in the last two years.
Analysts remain bullish and expect the stock to gain 18% from current levels.
