LOBLAW COMPANIES LTD. $41 (Toronto symbol L; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 281.5 million; Market cap: $11.5 billion; Price-to-sales ratio: 0.4; Dividend yield: 2.1%; TSINetwork Rating: Above Average; www.loblaw.ca) is Canada’s largest food retailer, with roughly 1,000 stores. George Weston Ltd. (Toronto symbol WN) owns 63% of the company’s shares.
Loblaw has announced a plan to form a real estate investment trust (REIT) that will hold most of its real estate assets.
Right now, the company owns 47 million square feet of real estate with a market value of $9 billion to $10 billion. Loblaw will transfer 35 million square feet of these properties—including stores, warehouses and office buildings—to the REIT. Loblaw will then rent these properties from this new trust. After the company closes this transaction in mid- 2013, it will sell units of the REIT to the public. Loblaw will hang on to a majority stake.
This move makes sense for Loblaw. REITs pay no income taxes, which gives them more cash to develop and expand their properties. As well, the REIT structure will make it easier for Loblaw to attract a wider variety of tenants to its new developments.
Meanwhile, the company continues to make progress with its multi-year plan to streamline its supply chain and avoid product shortages. Thanks to this plan, its sales rose 6.4%, from $29.4 billion in 2007 to $31.3 billion in 2011. Sales probably crept up to $31.6 billion in 2012.
Earnings jumped 128.9%, from $336 million in 2007 to $769 million in 2011. Earnings per share rose at a slower pace of 122.0%, from $1.23 to $2.73, on more shares outstanding. Without unusual items, Loblaw’s per-share earnings would have risen 14.6%, from $2.54 in 2010 to $2.91 in 2011.
For all of 2012, Loblaw expects to spend $1.1 billion on capital upgrades. It will spend 60% of this total on store renovations. The remaining 40% will go toward new computers and improving its supply networks.
Loblaw can comfortably afford these investments. As of October 6, 2012, its long-term debt was $5.4 billion, which is a high but still manageable 47% of its market cap. Loblaw also held cash and investments of $1.6 billion, or $5.63 a share.
Low p/e ratio for a market leader
The stock has gained 22% since the company announced the REIT plan in December 2012. Even so, the shares still trade at a reasonable 16.9 times the $2.42 a share that Loblaw probably earned in 2012. Its 2013 earnings could rise to $2.65 a share. The stock trades at 15.5 times that forecast.
As well, the company recently raised its quarterly dividend by 4.8%, to $0.22 a share from $0.21. The new annual rate of $0.88 yields 2.1%.
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