These days, it’s not easy to find value in the markets. We are in a bull market, one that has seen the S&P 500, the TSX Composite, and the MSCI all-world index set several record highs in just 12 short months. The hype surrounding generative artificial intelligence (AI) has convinced investors that “this time is different” and that the big technology companies propping up the market can’t possibly fail. All the classic signs of a bubble, such as people claiming “fundamentals don’t matter” or that “value investing is dead,” are beginning to rear their ugly heads.
It’s in precisely this type of market that one would do well to invest in out-of-favour stocks. The big U.S. technology companies are trading at about 45 times earnings on average; the entire NASDAQ-100 index has a market cap-weighted average price-to-earnings (P/E) ratio of 33. Many of these stocks will disappoint their investors. Value stocks, on the other hand, are among the most overlooked they’ve ever been. It may be a good time to start researching them. In this article, I’ll explore one Canadian dividend stock down 12.6% that could be worth holding for decades.
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Alimentation Couche-Tard
Alimentation Couche-Tard (TSX: ATD) is a Canadian gas station/convenience store company best known for owning Circle K. Circle K was previously a U.S. convenience store chain. Alimentation Couche-Tard bought the company from ConocoPhillips back in 2003. Since then, it has grown into one of the biggest convenience store chains in Canada, with hundreds of locations nationwide. The company also owns international franchises such as Couche-Tard in Quebec, Ingo in Scandinavia, and Holiday Stationstores in the United States.
Alimentation Couche-Tard’s claim to fame is its high-quality capital-allocation strategy. The company does not borrow heavily to do deals; instead, it retains most of its earnings and finances its deals that way. As a result, it has managed to keep its debt level within reason, with a debt-to-equity ratio of approximately one — extremely low for a company that is heavily involved in mergers and acquisitions (M&A).
The 7-Eleven fiasco
Speaking of M&A…
One reason why Alimentation Couche-Tard stock is down so much (12.6% from last year’s highs) is that it offered $40 billion to buy 7-Eleven. The deal ruffled some feathers because of the extreme sum that ATD offered for 7/11, the relatively high valuation of the deal, and the fact that ATD would have had to borrow billions of dollars to close the deal. It looked like Alimentation Couche-Tard was breaking with its historical strategy of fiscal prudence. Thankfully, Japanese regulators shot down the deal, and ATD withdrew its bid. Today, we are left with a very profitable company with a modest valuation.
Performance
Despite its consistent profitability and moderate growth potential, Alimentation Couche-Tard stock is fairly cheap, trading at the following multiples:
- P/E ratio: 19.5.
- Price-to-sales ratio: 0.7.
- Price-to-book: 3.3.
- Price-to-cash flow: 9.6.
ATD stock trades at lower multiples than the TSX Composite as a whole. The company has not been growing much in recent years, but that’s partially because of lower road transportation fuel prices, a highly cyclical factor. The company tends to earn good money from its fuel business over the long run, and will probably continue doing so in the future. Overall, I think ATD is a good long-term hold.
