LOBLAW COMPANIES LTD. $72(Toronto symbol L; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 407.4 million; Market cap: $29.3 billion; Price-to-sales ratio: 0.6; Dividend yield: 1.4%; TSINetwork Rating: Above Average; www.loblaw.ca) operates Canada’s largest supermarket chain. Its 1,100 stores include a variety of banners: Loblaw, Zehrs, Provigo, Real Canadian Superstore and No Frills.
In March 2014, the company purchased the Shoppers Drug Mart chain for $12.3 billion in cash and shares. Shoppers operates 1,300 drug stores across Canada.
Eliminating overlapping operations saved Loblaw $28 million in the quarter ended March 26, 2016. That helped lift its earnings by 12.3%, to $338 million from $301 million a year earlier. Due to fewer shares outstanding, per-share earnings rose 13.9%, to $0.82 from $0.72. Sales rose 3.3%, to $10.3 billion from $10.0 billion.
In the quarter, same-store sales at the supermarkets rose 2.6%, excluding gasoline. This year’s earlier Easter holiday accounted for a third of that increase. Shoppers’ overall same-store sales gained 6.3%. That reflects a 4.2% rise in prescription drug sales and an 8.2% increase in sales of store merchandise.
Loblaw is now thinking about selling its 212 gas stations. As part of any deal, gas station customers would continue to participate in the company’s loyalty rewards programs.
A sale could help Loblaw pay for the 50 new food stores it will open in 2016. It will renovate another 150 for a total cost of $1 billion.
As part of that plan, Choice Properties Real Estate Investment Trust (Toronto symbol CHP.UN) will contribute an additional $300 million to the renovations and construction. Loblaw owns 83.0% of the REIT, which gets 91% of its rental revenue from the company’s supermarkets and drug stores.
Loblaw’s balance sheet remains sound. As of March 26, 2016, its long-term debt was $10.4 billion, or a moderate 35% of its market cap. It also holds cash of $1.3 billion.
The company will probably earn $3.87 a share in 2016, and the stock trades at 18.6 times that forecast. It also recently raised its dividend by 4.0%. The new annual rate of $1.04 yields 1.4%.
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