The acquisition of a major drugstore chain has boosted revenue for this grocery giant, and is due to add more revenue through cannabis sales.
The company plans to distribute medical cannabis through its drugstores, which have secured deals with several major growers. It is already selling recreational cannabis in Newfoundland and Labrador. In the meantime, this blue chip has unlocked extra value by means of an exchange with its parent company that will give shareholders a substantial dividend increase.
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LOBLAW COMPANIES LTD., $58.79, symbol L on Toronto (Shares outstanding: 375.2 million; Market cap: $22.1 billion; www.loblaw.ca) operates 1,082 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. 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.
Loblaw has also starting selling cannabis through its 10 tobacco shops in Newfoundland and Labrador. Those outlets are next to its supermarkets.
On November 1, 2018, Loblaw transferred its stake in Choice Properties REIT, Toronto symbol CHP.UN, to its parent company George Weston Ltd., Toronto symbol WN.
Under the terms of the deal, Loblaw shareholders received 0.135 of a Weston common share for each L share they held. They will not have to pay capital gains taxes until they sell their new Weston shares. As a result of the transfer, Weston now owns 65.4% of the REIT. As well, Loblaw shareholders hold 16.8% of Weston’s shares.
Loblaw plans to maintain its current annual dividend rate of $1.18 a share (which yields 2.0%). 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.
Meantime, Loblaw earned $562 million in the three months ended October 6, 2018. That’s up 2.4% from $549 million a year earlier. Due to fewer shares outstanding, per-share earnings gained 7.2%, to $1.49 from $1.39.
Those figures exclude costs related to the Choice Properties transaction and other unusual items. On that basis, the latest earnings beat the consensus estimate of $1.44 a share.
Sales in the quarter rose 1.8%, to $14.45 billion from $14.19 billion a year earlier. Excluding revenue from Choice Properties, sales on a comparable basis improved 0.1%.
Same-store sales for the company’s supermarkets rose 0.9% on slightly higher food volumes and prices. Same-store sales for Shoppers Drug Mart also rose, up 2.5%. The gain reflects a 0.5% rise in prescription drug sales and a 4.3% increase in the sale of other merchandise.
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