This article originally appeared on The DIV-Net on August 6, 2008
In the quest to select solid dividend paying stocks that will appreciate over time and pay ever-increasing cash back to us in the form of dividends, success lies in the future, not the past. Sometimes the best dividend growing stocks for the future might be only in their infancy as far as dividend growth goes. As investors, if we can spot these stocks early we can be rewarded in spades as the years go by.A few Canadian companies strike me as fitting into this category very well.
Shoppers Drug Mart (SC) is a very well run retail drugstore chain with over 1,000 locations across Canada. Shoppers is in the sweet spot of demographic and transportation-cost trends. They have paid a dividend since March of 2005 only. Since they paid their first dividend Shoppers has raised their the cash payout by an astonishing compound annual growth rate of 30%. The stock currently yields about 1.6%, and the dividend pay out ratio as a percentage of earnings per share is only 28%.
In summary I believe the future is bright for Shoppers Drug Mart. Their dividend growth should continue as long as earnings push forward, which I believe they will. Even if the dividend growth and earnings growth rates slow significantly, most investors would be very happy with growth rates half of what Shoppers has produced from 2005 to date.
The caveat to Shoppers as an investment right now though is that the stock is not cheap. Trading at 22x earnings, any earnings miss or slowdown in growth could send this stock spiralling. That being said, I feel that any major weakness in this stock would be a huge buying opportunity, which is why I remain on the sidelines ready for such an event.
8 comments:
do you worry that they are over opening their stores. at some point the earnings growth from aggressive store openings will slow and the question becomes can they find a way to keep going?
Am I worried about that now? No. Might that become a concern later on, possibly. Look at Starbucks and Walgreen, they have both scaled back. Keeping it going after saturation is reached will be more about headwinds from demographics, convenience factors, and product offerings. I think right now Shoppers is doing everything right. Cosmetics etc. is a great area and their new stores are wonderful to be in. The convenience factor will always allow them to command higher margins than Wal-Mart and the other big box grocers.
hmmm.. My comments on Shoppers are on the record and well known to you MG, but I can't help but believe that this stock trades at an extremely rich multiple. Is Shoppers' growth potential really several times better than oil and gas right now? Why pay 22X earnings for something that sooner or later will slow to 10%/annum growth, when you can buy the O&G producers for 6X-8X earnings (ie: PCA, HSE, etc.), or even the banks at 10X earnings and not have to rely upon any growth at all to meet portfolio ROE targets?
If you look at the 'current' P/E of the TSX, its around 11-13 right now (strip out BCE, TAC, and anything else under takeover offers). To pay double the multiple takes a lot of faith.
Agreed pitz.
SC has a few years to go before saturation point issue. Their growth will continue but investor perceptions are going to change about how much to pay for earnings/dividends in coming future. There is no doubt SC is expensive but the trend is set for now and I'll keep holding until it crosses my target for the year.
would you consider selling puts as a way to enter a postion at a good price?
artboy, I am not really familiar or comfortable with options, so no.
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