Monday, February 6, 2012

Reitmans (Canada) Ltd.

First I would like to mention that Leon’s Furniture (TSX-LNF) has not only increased their dividend by some 11%, but also paid in special dividend in January 2012.The is a rather small family owned company that believes in treating shareholders well. This is a Consumer Discretionary stock and the stock prices are back to where they were in 2006/7. The recovery in Canada is taking longer than anyone thought it would and Consumer Discretionary stocks are suffering. However, the company seems more optimistic than some analysts and indeed the market, on this stock. One problem is stock is rather illiquid. I own stock in Leon’s.

I do not own Reitmans (TSX-RET.A). This is another Consumer Discretionary stock. The management of this company also seems more optimistic than the market. They raised their dividend by 11% in 2011 after keeping it the same between 2009 and 2010.

The dividend yield on this stock has been higher than it has been historically, as stock prices have been suppressed. If you held this stock for the past 10 years, you would have made money, probably around 28% to 30% with some 6% of this total return attributable to dividends. However, if you held this stock over the past 5 years, you would probably not have made any money. You would have collected around 4% per year in dividends.

The financial year for this company ends January 31 of each year. No one expects this company to do well for the financial year ending in January 31, 2012. However, analysts do expect that the company will begin to recover in 2013.

Dividend increases have been erratic on this stock, but the overall result is very good increases, with the 5 and 10 year growth in dividends at 14.9% and 22.8% per year, respectively. The Dividend Payout Ratios are good; with the 5 year median DPRs being 60% for earnings and 35% for cash flow.

The 10 year growth rates for this stock are much better than the 5 year growth rates. For example, the growth in revenues per share over the past 5 and 10 years are 3.2% and 7.7% per year, respectively. The growth in cash flow over the past 5 and 10 years is 4.7% and 17.9% per year, respectively.

As with a number of our stocks with a dominant owner, the debt ratios on this stock are very good. The current Liquidity Ratio is 4.72 and the Asset/Liability Ratio is at 4.78. The current Leverage and Debt/Equity Ratios are 1.26 and 0.26 respectively. This stock has a very strong balance sheet.

The Return on Equity for the financial year ending January 31, 2010 was 16.6% with a 5 year median also at 16.6%. The ROE for January 31, 2010 will probably be less, perhaps around 10%, but still a good ROE.

When I look at insider trading, there is some $5.6M insider selling and a minimal amount of insider buying. The selling all seems to be of options. There are lots of insiders with significant holdings in these shares. The only insider with more options than shares is the CFO. Some 35 institutions own 23% of the shares. Over the past 3 months, they are bought and sold shares and hold marginally fewer shares (much lower than 1%).

When I look at the analyst recommendations, I find Strong Buy, Buy and Hold. The consensus recommendation would be a Buy. Analysts mention the clean balance sheet. Others think that the company is in a tough business and it will not improve in the short term. One analyst says that the stock is a long term play. Another analyst thinks that the stock is too expensive with a P/E of 13 or 14.

The 5 year low and high median Price/Earnings Ratios are 9.76 and 15.63. The current P/E at 13.37 is above the median P/E of 12.97. I get a Graham price of $13.73 and the current stock price of $14.97 is some 9% higher. The median and high difference between the Graham Price and stock price is the stock price being the same as the Graham Price to 29% higher. Both these show higher than median relative stock prices.

The 10 year median Price/Book Value Ratio is 2.19 and the current one of 2.00 is some 91% of that. This shows a good, but not great stock price. The only place that shows a good stock price is the Dividend yield, which currently at 5.34% is some 14.6% higher than the 5 year median dividend yield of 4.66%. Also, the 10 year median high dividend yield is also lower at just 3.78%. So on a dividend yield basis, the stock is at a very good price.

The company has a significant amount in cash, current around $2.40 per share. If you took this amount off the share price it would lower the P/E ratio. They also have another $1.09 in marketable securities.

The Consumer Discretionary stock will probably not improve in the near term, but there is no reason to think they will not do so in the longer term. You would buy this stock for long term capital gains and an increasing dividend income.

Reitmans (Canada) Limited operates a network of clothing stores specializing in women's & men's fashions and accessories. The company operates stores under the names Reitmans, Smart Set, Pennington Superstores, RW & Co., Thyme Maternity, Addition-Elle, and Cassis. Sherlex Investments Inc (Reitman family) owns 50% of this company. Its web site is here Reitmans. See my spreadsheet at ret.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.

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