Shoppers Drug Mart

I own this stock (TSX-SC). I had followed this stock for a number of years before I bought it for the TFSA account in January 2009. I bought more in January 2010 and January 2011. By May of 2011 I started to feel that I should be investing differently for my TFSA so I sold some shares in May of 2011. Basically, I have broken even on this stock.

I must admit I have done worse on stocks, like losing money. However, you expect something better than just breaking even. I think I need to reconsider what I want to invest in for the TFSA account and get out of this stock. The problems are not really the fault of Shoppers, problems have occurred because of action taken by Ontario and other governments to reduce health costs.

Ontario, B. C. and Alberta have all big debts. We have health care costs that need to be brought under control. These provinces will have to (eventually anyway) bring health care costs under control. What has been hammering this company is Ontario changing the rules on generic drugs. Ontario did this to save money on health care. Alberta and B. C. are doing the same thing. I cannot see any of these governments changing their policies any time soon because of debt problems.

Dividends have been reasonable, with a 5 year median dividend yield of 1.89%. Increases have slowed down lately with the latest increase being just 6% compared to the 5 year growth rate of 15% per year. I certainly do not mind collecting dividends waiting for a stock to improve. Problem is will Shoppers improve?

The thing is they are not as fast growing as the 5 year dividend growth suggest. They had better growth when they started out. We are coming out of a recession and they have done better than a lot of companies over the past 5 years. However, their problems are not all caused by the recession. They are being caused by changing government policies.

So, let’s look at growth. The revenue per share has grown at the rate 6% and 11% per year over the past 5 and 10 years. EPS has grown at the rate of 7.8% and 10% per year over the past 5 and 10 years. Cash Flow has grown at the rate of 9.8% and 15.9% per year over the past 5 and 10 years. Book Value has grown at the rate of 9.7% and 11.4% per year over the past 5 and 10 years.

Now, if you had bought this stock 5 years ago, you would not have made any money. The total return is down about 2% per year. Dividends were about 1.8% per year. That gives a capital loss of 3.8% per year. If you had invested 10 years ago you would have had a total return around 9.7% per year with dividends being around 1.6% per year. This stock peaked in 2007 and has not fully recovered.

However, one does make an investment for what a stock has done in the past. One invests for what one expects a stock to do in the future. Although this company has been making money and it has been increasing their revenue, earnings and cash flow, it also appears that it probably has tough times ahead.

The other things that are good about this stock are the Return on Equity and the Debt Ratios. The ROE at the end of 2011 was very good at 14.4%. The 5 year median ROE is also very good at 15.3%. There is also no big difference between this ROE and the ROE based on comprehensive income. The ROE based on comprehensive income are 13.9% for the end of 2011and has a 5 year median of 14%.

The current Liquidity Ratio is 1.52 and this is better than it has been in the past. The Liquidity Ratios have been ok over the past 5 year, but were quite low before that. The 10 year median Liquidity Ratio is 1.15. The Asset/Liability Ratios has always been very good and it is higher also than in the past. The current one is 2.54. The current Leverage and Debt/Equity Ratios have always been good and they are currently at 1.71 and 0.67.

It is not so much that the market does not recognize that the company has continued to make money and increase its revenues, earnings and cash flow so much as it is assigning a lower price/earnings ratio to the company. When this stock was originally issued it was considered to be a growth company and got P/E ratios for a growth company. However, since the company peaked in 2007, the P/E ratios have been coming down.

The low and high median P/E ratios assigned originally were 20 to 26. The current 5 year median P/E ratios are 15 to 19. Then the P/E range in 2011 was 13 to 15. With every further bit of bad news for this company, the P/E ratios come down. One analyst thought that a good ratio for this company might be 14. But perhaps the P/E ratios will continue to come down. I do not expect the range to come lower than 10 to 15, but it could still go lower than the current range.

Shoppers Drug Mart Corp. is a licensor of Shoppers Drug Mart in Canada and Pharmaprix in Quebec. The company owns and operates Shoppers Home Health Care stores. It also owns MediSystem Technologies Inc. and the new Murale Stores. This is a widely held company. Its web site is here Shoppers. See my spreadsheet at sc.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.