Alimentation Couche-Tard’s 25% dividend hike came before its sales slip in the quarter, although an earnings jump and a stock split increase its appeal for investors.
A history of successful acquisitions continues to diversify the firm’s revenue stream, while last year’s end of its dual-class -share structure enhances its appeal with many investors.
ALIMENTATION COUCHE-TARD (Toronto symbol ATD.B; www.couchetard.com) is a buy. This established retailer operates 12,328 convenience stores across North America and Europe.
On December 8. 2021, the company ended its dual class share structure. That’s when it converted all of its outstanding class B shares to class A shares on a one-for-one basis. The stock now solely trades under the symbol ATD.
A so-called sunset clause was put in place in 1995 to bring an end to the dual-class share structure when the youngest of the company founders turned 65 or passed away.
The clause was triggered with the birthday of the youngest founder, Jacques D’Amours. The class A shares owned by the four founders—D’Amours, Alain Bouchard, Richard Fortin and Réal Plourde—carried 10 votes per share while class B shares carry one vote per share.
The four founders unsuccessfully tried to extend their voting rights in 2016, but a shareholder vote on the proposal was cancelled after they concluded the necessary two-thirds support from subordinate shareholders would not be possible.
In the three months ended October 10, 2021, sales jumped 33.5%, to $14.22 billion from $10.66 billion a year earlier (all figures except share price in U.S. dollars). As the imposition of social distancing measures continued to ease in the various regions that Couche-Tard operates in, foot traffic for its locations climbed. Fuel volumes also rose rapidly.
Excluding one-time items, earnings per share fell 1.5%, to $0.65 from $0.66. The higher sales were offset by lower transportation fuel profit margins in the U.S.
The company’s outlook remains positive, and earnings should rise as it further integrates its recent acquisitions. Couche-Tard also plans to continue to launch fresh-food initiatives and promotions to boost sales. Meanwhile, investors will see their quarterly dividend rise 25.7% with the December 2021 payment. The shares now yield 0.9%.
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What is a dual-class share structure?
A dual-class share structure is a corporate ownership arrangement where a company issues different classes of shares with varying voting rights, typically giving founders or insiders greater control through shares with enhanced voting power while public investors receive shares with limited voting rights.
What are subordinate voting shares?
Subordinate voting shares are a class of stock that carries fewer voting rights per share than another class (typically multiple voting shares) in a dual-class share structure, often issued to public investors while founders or controlling shareholders retain the shares with greater voting power.
Why are dual-class shares controversial?
Dual-class shares are controversial because they create unequal voting rights that allow founders or insiders to maintain control despite owning a smaller economic stake, potentially leading to governance issues where minority shareholders have limited ability to influence corporate decisions.
What are the concerns/disadvantages of dual-class share structures?
Disadvantages of dual-class share structures include corporate governance concerns, potential conflicts of interest between controlling and minority shareholders, exclusion from certain stock indices, reduced takeover protection for the company, and possible negative impact on long-term performance due to entrenched management.
Note, though, that firms with dual-class share structures typically have “coattail provisions” in place. These provisions aim to ensure that both share classes have equal rights in the event of a takeover. Specifically, shareholders of both classes get one vote per share in the event of a takeover bid.
Growth Stocks: Another acquisition expands earnings
In December 2020, the company completed the purchase of Convenience Retail Asia for $360 million. Convenience Retail Asia, through its Circle K HK unit, operates a network of Circle K-licensed convenience stores. Of those, 340 are company-operated sites in Hong Kong and 33 are franchised sites in neighbouring Macau.
Circle K HK currently holds the second-largest market share in Hong Kong, one of the most economically developed markets in Asia. It’s one of the world’s most densely populated cities, but still offers room to grow. Beyond that, Couche-Tard sees the acquisition as a springboard to expand into Asia.
Furthermore, Circle K HK has developed expertise in loyalty programs, with its approximately 1.6 million “OK Stamp It” members. It has also established a strong private-label program and advanced merchandising, technology and supply chain capabilities. Couche-Tard aims to use the best of these ideas in its North American and European stores.
Acquisitions are a key part of the company’s growth strategy. That adds risk, but it does a good job of integrating and modernizing the businesses and assets that it buys. This includes introducing more-profitable products at acquired stores, including new drinks and improved fresh and takeout food. What’s more, Couche-Tard has been careful not to overpay for big acquisitions just for the sake of growth.
Recommendation in Power Growth Investor: Alimentation Couche-Tard is a buy.
