This giant retailer hopes to distribute medical cannabis through its drugstore arm, which it purchased in 2014. That pharmacy chain has secured deals with several major growers. But separately, the company also aims to unlock hidden value for investors with a newly announced exchange deal.
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LOBLAW COMPANIES LTD., $68.59, symbol L on Toronto (Shares outstanding: 374.6 million; Market cap: $25.7 billion; www.loblaw.ca) operates 1,083 supermarkets under 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 now operates 1,335 drug stores across Canada.
Loblaw feels its Shoppers Drug Mart stores give it a strong platform to profit from the legalization of recreational cannabis on October 17, 2018. That’s because their pharmacy operations have experience distributing controlled substances and counselling customers about their effects.
In the past few months, Loblaw has applied to distribute medical cannabis products through Shoppers. As part of that plan, Shoppers has already secured supply deals with several licenced medical marijuana producers, including Aurora Cannabis and Aphria. It’s possible that Shoppers stores could eventually sell recreational cannabis.
Shoppers has also formed an alliance with insurance provider Manulife Financial Corp., Toronto symbol MFC, which is now offering medical cannabis insurance coverage. Manulife clients that qualify for cannabis treatments can now consult with a Shoppers pharmacist to determine the appropriate strains and how to safely take it.
In addition, Loblaw is looking at selling cannabis though dedicated stores separate from the Shoppers chain.
The company has applied for a licence to sell recreational cannabis in Newfoundland and Labrador. If successful, it would sell the drug in its existing tobacco shops next to its supermarkets.
The province plans to licence around 45 cannabis stores; 10 of Loblaw’s locations made the initial list of qualified applicants.
Meantime, Loblaw recently announced a new plan that should unlock some of its hidden value.
It will transfer its 61.6% stake in Choice Properties REIT, Toronto symbol CHP.UN, to its parent company George Weston Ltd., Toronto symbol WN. In exchange, Loblaw shareholders will receive 0.135 of a Weston common share for each share they hold. They will not have to pay capital gains taxes until they sell their new Weston shares.
Weston (which currently owns 50.1% of Loblaw) also holds 3.8% of Choice. Following the transfer, it will own 65.4% of the REIT. As well, Loblaw shareholders will hold 16.8% of Weston’s shares.
Loblaw plans to maintain its current annual dividend rate of $1.18 a share (which yields 1.7%) after the exchange. In addition, Weston will raise its quarterly dividend by 5% to $0.515 a share. The new annual rate of $2.06 yields 2.1%.
If you combine those two payments, the total of $1.46 a share represents a 23.7% increase over Loblaw’s current dividend. The deal also lets the company focus exclusively on its retail businesses.
Loblaw shareholders, excluding Weston, will vote on the deal in October 2018. If they approve, the company expects to complete the transaction by the end of this year.
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