Alimentation Couche-Tard (TSX:ATD) stock has created tremendous wealth for long-term shareholders. According to YCharts, in the last 20 years, it delivered annualized returns of north of 20%. And in the last 10 years, it delivered annualized returns of over 18% per year. Any stock investor would love that kind of return for their investments!
Alimentation Couche-Tard: A business overview
Couche-Tard has been a global acquirer of convenience stores, with most locations offering roadside fuel. In its latest presentation, it explained that approximately 65% of its transactions are convenience only, 25% are fuel only, and 10% are a mix of both.
Geographically, it generates about 66% of its revenues in the United States, 21% in Europe and other regions, and 13% in Canada. Gross profit wise, 71% originates from the U.S., 17% from Europe and other regions, and 12% from Canada. Based on product mix, 74% of its revenue is from fuel, and 24% is from merchandise and service. As well, 50% of its gross profit is from fuel, and 49% is from merchandise and service.
In the past, it has counted on making strategic acquisitions and juicing out synergies to grow. Importantly, it also keeps a tab on its costs and has financial discipline, including paying reasonable multiples for fitting acquisitions and paying down debt before making large acquisitions. Therefore, it has generated increasing cash flows over time.
Strong returns
Its market-beating, long-term stock returns are driven by rising earnings and cash flows. For example, in the past 10 fiscal years, it increased its adjusted earnings per share at a compound annual growth rate of 22.5%. Its five-year return on equity of 23% is also proof of management’s excellence in capital allocation. Its 15-year dividend growth rate of 24% is simply incredible, with its last dividend hike in November at 25%, which indicates no slowdown.
Going forward, management expects less growth to come from mergers and acquisitions and has been putting more effort into organic growth, which it now anticipates will contribute about 50% of its growth. This shift in its growth strategy might be why the stock has dipped 12% recently from its 52-week high, as the market requires validation of this change.
The company also must invest in the transition to electric vehicle charging stations. In the past three fiscal years, about 38% of its operating cash flow went into its capital spending. In the trailing 12 months (TTM), 47% of its operating cash flow went into its capital spending. That said, it’s still generating substantial free cash flow (FCF). For example, its TTM FCF generation was north of US$4 billion. In comparison, its dividend payment in the period was below $355 million, which is a payout ratio of under 9%.
Should you buy ATD stock?
Should investors consider buying the stock today? At $76.71 per share at writing, the growth stock trades at about 19.6 times earnings, which is a reasonable buy for the potential of earnings growth of north of 10% per year over the next few years.
Analysts agree ATD stock is a decent buy. The consensus 12-month price target represents a discount of about 12% in the proven business. So, interested investors can consider buying some shares at current levels.
