Tuesday, February 5, 2008

drugs 'n dividends

The largest pharmacy chain in Canada, Shoppers Drug Mart (SC), has raised it's dividend by almost 35%. The company raised the annual pay out on the back of a 16% rise in 4th quarter profit, and same store sales growth of 3.9%. Sales of the company's private label and exclusive brands rose an astonishing 16.1%. I guess people are really buying up the 'Life' brand.

Considering that the dividend raise was double the EPS growth rate, this tells me something about the stock Shoppers wants to become. This company seems to really be putting an emphasis on dividend growth, and is trying to make themselves into more of a dividend play. Even after this dividend raise the yield is still relatively low at around 1.7%, but if Shoppers continues to raise dividends faster than EPS growth then their pay out ratio will rise and the company may attract more dividend investors as their yield climbs up to the 2.5% - 3.5% range. Perhaps the company is looking into the future and seeing the reality that they may reach the saturation level sooner rather than later, and their growth is bound to slow.

After going through the Walgreen (WAG) experience it is easy to see that Shoppers is currently sitting on a precarious valuation perch of 23x earnings. It is inevitable that the company will report a weak earnings growth quarter at some point and the stock will likely get knocked down hard. This could be a wonderful buying opportunity for long term investors, as I believe currently exists with Walgreens. You can be assured that this stock will not demand premium P/E forever, but it's always difficlult to know when it will shrink and by how much. As of right now the stock looks like a fabulous buy whenever the shares dip below $48 or so, but this is assuming that their torrid rate of earnings growth continues unabatted. Even if the P/E shrinks this entire industry has the tailwind of demographics at its back; as the baby boomers age and need more drugstore goods while they also seek convenience over price.

Personally I really like the company, and I like the industry fundamentals and outlook even better.

Here is a glimpse at Shoppers Drug Mart's Recent dividend record:
2005 = $0.40
2006 = $0.48
2007 = $0.64
2008 = $0.86 (projected)

Swift dividend growth indeed, as they have more than doubled their dividend in 3 years.


Canadian Dollars said...

Shoppers is truly a great Canadian success story. Despite their high prices (which are good for their margins) their stores seem to be in heavy traffic areas and are remarkably always busy.

With all the new 24 hour shoppers drug marts opening up everywhere, they're really stealing a lot of the old niche convenience store business by offering more selection and arguably better service.

Definitely a great success story. I was secretly hoping that they'd have a 'bad quarter' (relatively speaking) in the last quarter, but they managed to knock it out of the park.

Those defensive stocks are looking good, eh mg?


Middle Class Millionaire said...


I agree with you. SC is a great company but is certainly priced to perfection which is a big red flag for me.

pitz said...

86 cents/share, I can't believe it!