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Topic: Dividend Stocks

CANADIAN TIRE CORP. $91 – Toronto symbol CTC.A

CANADIAN TIRE CORP. $91 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 80.5 million; Market cap: $7.3 billion; Price-to-sales ratio: 0.6; Dividend yield: 1.5%; TSINetwork Rating: Above Average; www.canadiantire.ca) operates 490 Canadian Tire stores, which specialize in automotive, household and sporting goods. The company owns these outlets, but franchisees operate most of them. Canadian Tire also operates 300 gas stations and 87 PartSource auto parts stores.

In the 1990s, big U.S. retailers like Wal-Mart and Home Depot expanded to Canada. In response, Canadian Tire upgraded its stores with better signage, wider aisles and brighter lighting. These improvements also made it easier for managers to move faster-selling seasonal merchandise to high-traffic areas of the store.

The company is also trying out new formats. For example, it recently opened a smaller store in Toronto. This outlet, called Canadian Tire Express, is one-third the size of a regular Canadian Tire store and mainly features items like light bulbs and plumbing parts instead of tires and lawnmowers.

If this test is successful, the company plans to open 40 to 60 Express stores in major Canadian cities.

Recent acquisitions make a good fit

In addition to better stores, Canadian Tire has diversified its product lines by purchasing retailers that offer specialized items. These acquisitions include Mark’s, which sells casual and work clothing though 385 stores, and Forzani Group, which offers sporting goods at 413 outlets, mainly under the Sport Chek banner. As well, Canadian Tire just completed its $85-million purchase of Pro Hockey Life, which sells hockey gear at 23 outlets.

The recession and low gasoline prices cut Canadian Tire’s 2009 sales by 4.8%, to $8.7 billion from $9.1 billion in 2008. Sales rebounded to $9.2 billion in 2010, and rose to $11.4 billion, in 2012.

Earnings in 2009 fell 10.9%, to $4.10 a share (or $335.0 million) in 2009 from $4.60 a share (or a total of $375.4 million) in 2008. However, earnings recovered with sales and jumped 48.8%, to $6.10 a share (or $499.2 million), in 2012.

The company now aims to unlock the value of its real estate holdings by transferring most of these assets to a new, publicly traded real estate investment trust. Under the company’s plan, which is similar to a move by grocery retailer Loblaw Companies (Toronto symbol L), Canadian Tire will switch 250 of its stores, a distribution centre and other properties to the new REIT.

In all, these assets total 18 million square feet and are worth $3.5 billion. That’s 72% of Canadian Tire’s 25 million square feet of real estate. After this transaction closes in the fall of 2013, Canadian Tire will sell units of the REIT to the public. It will hang on to an 80% to 90% interest.

Finance division is underappreciated

Another overlooked asset is Canadian Tire’s financial services division, which mainly issues credit cards. Right now, one in five Canadians hold a Canadian Tire Options MasterCard. This business also offers no-fee savings accounts and sells insurance. In the latest quarter, it accounted for just 8% of Canadian Tire’s revenue but supplied 43% of the company’s pre-tax earnings.

Canadian Tire now wants to find a partner, probably a bank, for its $4.4-billion credit card portfolio. Financial regulators require the company to hold enough cash and other securities to cover bad loans, so this move would free up cash that it can invest in its retail stores.

The company would also likely keep 80% of the profits and continue to gain access to information about customers’ shopping habits. Retailers are increasingly studying this data to improve customer service and encourage repeat visits.

Canadian Tire should have little trouble finding a credit card partner. In the second quarter of 2013, the finance division’s revenue rose 4.8%, while pre-tax income jumped 32.8%. As well, more cardholders are paying their bills on time: Canadian Tire wrote off 5.86% of its credit card receivables in the latest quarter, down from 7.16%.

The company’s sound balance sheet will let it keep investing in new growth initiatives. Its long term debt of $2.1 billion is a moderate 29% of its market cap. It also holds cash and investments of $899.8 million, or $11.18 a share.

P/e still attractive after big gain

The stock is up 30% since the start of 2013, mainly in response to the REIT spinoff. Even so, it still trades at a reasonable 13.2 times the $6.92 a share that Canadian Tire will probably earn in 2013.

The REIT and finance division plans should also give Canadian Tire more cash for dividends. The current rate of $1.40 a share yields 1.5%.

Canadian Tire is a buy.

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