Topic: How To Invest

Best Canadian Stocks: Loblaw in line for higher profits and dividends with Shoppers Drug Mart acquisition

Investment AdviceEvery Tuesday we bring you “Best Canadian Stocks.” You get our specific recommendation on the stocks we profile, with a full explanation of how we arrived at our opinion. You’ll read about stocks making moves that are covered in one of our three newsletters featuring Canadian stocks—The Successful Investor, Stock Pickers Digest and Canadian Wealth Advisor.

LOBLAW COMPANIES (Toronto symbol L; www.loblaw.ca) is Canada’s largest food retailer, with about 1,200 stores. Its banners include Loblaws, Provigo, Fortinos, Real Canadian Superstore and No Frills.

In March 2014, the company completed the acquisition of the 1,250-store Shoppers Drug Mart chain. Loblaw paid $12.3 billion; $6.6 billion in cash and $5.7 billion in Loblaw common shares.

Loblaw’s parent company, George Weston Ltd. (see below), helped it pay for Shoppers by purchasing $500 million of new Loblaw shares. Due to the extra shares outstanding, Weston now owns 46% of Loblaw, down from 63% before the acquisition.


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Cost savings from merging Shoppers provide room to raise the dividend

In the quarter ended June 14, 2014, Loblaw’s sales rose 37.1%, to $10.3 billion from $7.52 billion a year earlier. Without Shoppers’ contribution, sales rose 2.4%. Before one-time items, earnings gained 17.2%, to $0.75 a share from $0.64.

The addition of Shoppers Drug Mart should increase Loblaw’s earnings to $2.82 a share in 2014, and the stock trades at 18.8 times that estimate. Its 2015 earnings should reach $3.41 a share, and the stock trades at a more reasonable 15.6 times that forecast.

Cost savings from the merger will also give Loblaw further room to raise its dividend. The company just increased its quarterly payout by 2.1%, to $0.245 a share from $0.24, with the July 2014 payment. The stock yields 1.9%.

Loblaw is a buy recommendation of Pat McKeough’s advisory on safety-first investing, Canadian Wealth Advisor.

If you’re a member of Pat’s Inner Circle and you’d like to ask a question about today’s article or another stock or investment topic, please go to the question page reserved for you (be sure you’re logged in first). Click here to ask your question.

Last week’s “Best Canadian Stocks” post was on another retail icon. You can see the article here.

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