A 2014 acquisition continues to boost this stock’s revenue, and promises to add more through cannabis sales.
Even without extra cannabis revenues, this company is unlocking extra value. It recently completed a spinoff that should benefit this stock, its parent company and shareholders of both. In the meantime, the company has also added value for shareholders with stock buybacks and a recent dividend hike.
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LOBLAW COMPANIES (Toronto symbol L; www.loblaw.ca) operates 1,093 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.
Thanks to the Shoppers purchase, overall sales for Loblaw increased 44.3%, from $32.4 billion in 2013 to $46.7 billion in 2017. If you exclude costs to integrate Shoppers and other unusual items, earnings soared 158.5%, from $696 million in 2013 to $1.8 billion in 2017. Due to the additional shares outstanding as a result of the Shoppers purchase, per-share earnings rose at a slower rate of 82.7%, from $2.48 to $4.53.
For the three months ended June 16, 2018, Loblaw’s overall sales fell 1.4%, to $10.9 billion from $11.1 billion a year earlier. That’s mainly because the company sold all of its 213 gas stations in July 2017 for $540 million. Excluding gasoline purchases, same-store sales at its supermarkets rose 0.8%.
Earnings in the quarter declined 5.6%, to $421 million from $446 million a year earlier. Loblaw spent $300 million on share buybacks. As a result of fewer shares outstanding, earnings per share were flat from a year earlier at $1.11 a share.
In September 2018, the company announced that it would transfer all of its 61.6% stake in Choice Properties REIT, Toronto symbol CHP.UN, to its parent company George Weston Ltd., Toronto symbol WN.
With the transfer of the Choice Properties’ units, Loblaw shareholders receive 0.135 of a Weston common share for each Loblaw 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. That transaction was completed last week. Following the transaction, there was a decline in the price of Loblaw’s stock.
Value Stocks: With medical cannabis license assured, Shoppers interested in recreational marijuana
In September, Health Canada awarded Shoppers Drug Mart a licence to produce medical cannabis. Shoppers does not plan to grow the drug, but has signed supply deals with several major cannabis producers, including Tilray, Aurora Cannabis and Aphria.
This licence is the first step in Shoppers’s plan to distribute medical cannabis through its pharmacies. The second step is a sales licence, which would let it sell those products to patients over the Internet.
In addition to medical cannabis, Loblaw is interested in selling recreational marijuana since it became legal on October 17, 2018. It has applied for a licence to sell the drug through its smoke shops in Newfoundland and Labrador.
In the meantime, Loblaw continues to expand its PC Express program, which offers in-store pickup and home delivery. By the end of 2018, the company will provide pickup services in 700 of its grocery stores, up from the current 200. Loblaw will also expand home delivery, from 11 cities to 16.
Loblaw last increased its quarterly dividend with the July 2018 payment. Loblaw’s dividend has grown an average of 4.2% annually over the last 5 years. Investors now receive $0.295 a share, up 9.3% from $0.27. The new annual rate of $1.18 yields 1.9%.
The stock trades at 10.9 times Loblaw’s projected 2018 earnings of $4.75 a share.
Loblaw will report third-quarter earnings on November 14, 2018 and we will discuss those earnings in a future issue of The Successful Investor.
Recommendation in The Successful Investor: Loblaw Companies is a buy.
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