Valued at a market cap of $55 billion, Loblaw (TSX:L) is a food and pharmacy company engaged in segments such as grocery, pharmacy, health, beauty, apparel, financial services, general merchandise, and more. It has two primary business segments:
- Retail: It operates corporate and franchise-owned retail food stores and associate-owned drug stores. The segment includes in-store pharmacies, health, beauty, apparel, and merchandise stores.
- Financial Services: This segment provides credit card and banking services, insurance brokerage services, and telecom services. It also offers the PC Health application, which provides Canadians with access to healthcare resources and support.
Loblaw is among the largest companies in Canada. In the last 20 years, it has returned just 210% to shareholders in the past decade. However, if we adjust for dividend reinvestments, cumulative returns will be closer to 368%.
Comparatively, the TSX index has returned 413% in dividend-adjusted gains since November 2024. While Loblaw stock has trailed the broader markets, let’s see if the blue-chip TSX stock is a good buy right now.
Is Loblaw stock a good long-term investment?
Loblaw has increased its sales from $48 billion in 2019 to $59.5 billion in 2023. In the last 12 months, its sales have risen by 2.7% year over year to $60.6 billion. Comparatively, its free cash flow has risen from $3.14 billion in 2019 to $4 billion in 2023. Its free cash flow has totalled $3.8 billion in the last four quarters.
Loblaw pays shareholders an annual dividend of $2.05 per share, indicating a yield of 1.13%. Given its outstanding share count of 306.4 million, Loblaw’s annual dividend expense is around $625 million, indicating a payout ratio of under 20%.
So, Loblaw generates enough cash to easily meet its dividend requirements, providing it the liquidity to invest in acquisitions, lower long-term debt, and raise dividends further. Loblaw ended the third quarter (Q3) with a long-term debt of $5.08 billion, down from $6.44 billion in 2022. Further, its annual dividend per share has risen from $0.16 in November 1997, indicating a compound annual growth rate of 16%.
Loblaw is part of a recession-resistant industry, which allows it to report steady revenue and cash flow across business cycles. In Q3, its sales rose by 1.5% year over year to $18.5 billion, while adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew by 7.4%. A focus on cost savings enabled Loblaw to increase adjusted earnings per share by 10.6% to $2.50 in the September quarter.
What’s next for the TSX stock?
Loblaw continues to grow its store count which should help it drive future cash flow and earnings higher. During the recent earnings call, Loblaw Galen Weston stated, “We’re still pleased with the success of our conversions and the ongoing success of our Maxi banner in Quebec, which celebrated the opening of its 175th store in the quarter. Last week, we opened our 183rd Maxi and we have four more to go before year-end. We opened six small-format No Frills stores in Q3.”
In the current quarter, Loblaw will add another 20 new Maxi and No Frills stores, the majority of which will be new constructions, as it expects to open 50 new stores in 2024.
Priced at 19.8 times forward earnings, Loblaw stock is reasonably priced, given that its adjusted earnings are forecast to grow 10.2% over the next two years. Analysts remain bullish and expect the TSX dividend stock to gain another 5% over the next 12 months when looking at consensus price target estimates.
