Alimentation Couche-Tard (TSX:ATD) and Empire (TSX:EMP.A) are both consumer stocks. There are differences between the two, though. First, Yahoo Finance categorizes Alimentation Couche-Tard as a specialty retailer in the consumer cyclical sector and Empire as a grocery store in the consumer defensive sector. At a high level, from a categorization standpoint, it means that Empire’s business performance should be more predictable with less impact from the ups and downs of the economic cycle.
Earnings quality
Let’s see if that’s actually the case by comparing the diluted earnings per share (EPS) of the two businesses over the long run. From fiscal 2007 to 2023, Couche-Tard increased its EPS at a compound annual growth rate (CAGR) of 22.4%.
During the global financial crisis, in fiscal 2008, Couche-Tard only saw a 2% cut in its EPS. It increased its earnings at a double-digit rate in most of the years that followed. Only one other year saw a cut in its earnings and it was only a 1% drop. So, Couche-Tard seems to generate quality earnings that are resilient and persistently growing over time.
Empire experienced some major hiccups with its merger of Safeway around fiscal 2016, which drove a 20% drop in its earnings, which continued falling into fiscal 2017. Thankfully, that’s all in the rear-view mirror. The grocery chain has since turned around with earnings normalizing by fiscal 2020. From fiscal 2020 to 2023, Empire increased its EPS at a CAGR of 8.4%.
The normal course of operations (without impacts from any potential mergers and acquisitions (M&A)) should drive stable earnings growth going forward given the defensiveness of the business, as everyone needs to shop for groceries. Analysts call for adjusted EPS growth of about 10% per year over the next couple of years.
Both companies earn resilient earnings, but Couche-Tard could deliver higher earnings growth from its M&A strategy, which management projects will contribute to 50% of its growth going forward.
Dividend
Alimentation Couche-Tard only yields 0.9% at writing, but the business has been expanding healthily with M&A and paying down debt diligently. Its growth strategy has allowed it to increase its earnings, cash flows, and dividends at an above-average rate for the long haul. For example, its 15-year dividend growth rate is 24%. Its last dividend hike in November was 25%.
Empire’s dividend yield doubles that of Couche-Tard’s at almost 2.2%. It is also a dividend grower with a 15-year dividend growth rate of 7.8%. Its last dividend hike was about 10% in June.
Valuation
Couche-Tard rightly trades at a higher price-to-earnings ratio (P/E) because the market expects higher growth from the business than Empire. At $75.69 per share at writing, it trades at a blended P/E of about 19.3 with the analysts calling a discount of about 13%.
At $33.68 per share, Empire trades at a blended P/E of about 12.3, whereas the stock could trade at a normal P/E of about 14. Analysts believe Empire trades at a discount of about 12%, which aligns with the target P/E of 14.
Although Empire trades at a lower P/E, it appears both stocks trade at a similar discount from where they could normally trade. So, neither stock has an advantage over the other in terms of valuation.
ATD and EMP.A Total Return Level data by YCharts
Which is a better buy now?
The graph above shows a recent total return of the two food stocks over three years. Given that Couche-Tard has more persistent stock price momentum and the two trade at a similar discount, I think Couche-Tard is a better buy today despite it offering a smaller yield.
