Tuesday, January 31, 2012

Loblaw Companies

Currently, I am trying to review all the stocks I follow that I did not review in 2011. I will only be putting out one entry per stock until I finish this list off.

I do not own Loblaw Companies (TSX-L) but I used to. This is an interest stock to look at. It got into trouble back in 2005 and it has yet to recover. I bought this company in 1996 and 1998 and then sold in 2007. I made 10.14% per year on this stock. The portion of my return attributable to dividends would be 1.92% per year or 18.8% of my return. I sold because I did not see the company improving any time soon.

This company used to have a very good record of increasing their dividends. The model was low dividend yield (1% or lower), low Dividend Payout Ratios (20% for earnings, 10% for cash flow), and high dividend increases (20%). Model values are to give you an idea of what they would be aiming for, they are not meant to be exact figures.

They got into difficulties and the dividends have not changed from 2005. The 5 year median DPRs are 35% for earnings and 15% for Cash Flow. The DPRs for 2011 is expected to be some 29.5% for earnings and 14.4% for Cash Flow. DPRs are certainly improving recently, but I doubt if they have come down far enough for any dividend increases.

If you had held this stock over the past 5 and 10 years, you would not have made any money. The portion of the total return from dividends is around 1.8%, but they do not cover the capital loses. The stock has been improving since 2005, but the current stock price is still around 50% less than the high made in 2005.

Generally speaking with growth rates, the 10 year growth rate is better than the 5 year one. For example, for earnings, the 5 year growth rate is a negative 2% per year. The 10 year growth rate is 3.6% per year. The thing is the 10 year growth rate starts before 2005 (that is in 2001) when the company still had growth. There really has been not much growth over the past 5 years, which starts in 2006.

The company still has earnings and cash flow. They only had one year, in 2006 with negative earnings and no years of negative cash flow. However earnings are not what they used to be and they are not increasing like they used to.

As far debt ratios, they are fine and have generally been fine. The current Liquidity Ratio is 1.45, the current Asset/Liability Ratio is 1.54, the current Leverage Ratio is 2.84 and the current Debt/Equity Ratio is 1.84.

The return on equity ratios since 2005 is not like those prior to that year. The one ROE for the financial year ending in 2010 is 9.9%, on the edge of being good. The one for 2011 is expect to be good at 12.5%.

When looking at insider trading, I find insider selling of $2.3M and minimal insider buying. All insiders, but directors have more stock options than shares. Some 126 institutions hold around 11% of the outstanding shares. Over the past 3 months there has been lots of buying and selling and they have marginally decreases their shares.

When I look at analysts’ recommendations, I find Strong Buy, Buy and Hold recommendations. The consensus is a Buy. The reason for Loblaws problems was their IT spending on a new supply chain. I had given up in 2007 that it would be finished anytime soon. Now the analysts with Buys recommendations feel that IT expenses will start to decline in 2013and that the new supply chain system will be finished at the end of 2011. (I have heard this before.) The Buy recommendation comes with a 12 months stock price of $42.90 and a Strong Buy comes with a 12 months stock price of $50.

I get a 5 year median low and high Price/Earnings Ratio of 13.20 and 17.79. The current P/E ratio of 12.2 is therefore low on a stock price of $36.45. I get a 10 year median Price/Book Value Ratio of 2.54 and a current one of 1.73. This is some 67% of the 10 year median ratio and points to a low stock price.

I get a Graham Price of $37.75 and the stock price of $36.45 is some 3.4% lower. Over median difference between the Graham Price and the stock price over the past 10 years shows the stock price way above the Graham Price. (This is typical of growth stocks, which Loblaws was.) This has changed over the past 5 years. The median difference between the stock price and Graham Price over the past 5 years is the stock price being 4% higher than the Graham Price. The low difference between the stock price and Graham Price is the stock price being 8.8% lower. This shows a better than reasonable stock price.

The last thing to look at is the Dividend yield. The current yield of 2.3% is some 5.4% higher than the 5 year median dividend yield of 2.19%. This shows a reasonable stock price. So my stock price tests shows the stock price ranging from low to reasonable.

I have other stocks in Consumer Staples, including Metro and Alimentation Couche-Tard Inc., so I do not need any stock in this area. I am not considering Loblaws at the time as an investment. I might look again when it restarts raising their dividends again.

Loblaw Companies Limited, a subsidiary of George Weston Limited, is Canada's largest food retailer and a leading provider of drugstore, general merchandise and financial products and services. Loblaw offers Canada's strongest control (private) label program, including the unique President's Choice, no name and Joe Fresh brands. In addition, the Company makes available to consumers President's Choice financial services and offers the PC point loyalty program. W. Galen Weston and George Weston Ltd own 63% of this company. Its web site is here Loblaw. See my spreadsheet at lob.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

No comments:

Post a Comment