Loblaw Companies Ltd. 2

On my other blog I am today writing about Big Risk and Returns continue...

I do not own this stock of Loblaw Companies Ltd. (TSX-L, OTC- LBLCF), but I used to. I have followed this stock for some time. I got the stock from Mike Higgs' list of dividend growth companies. I owned it from 1996 to 2007. It was originally a great stock. I sold it in 2007 because it was having problems with its tech upgrade to its supply system.

The insider trading report shows insider selling at $54.8M and net insider selling at $54.4M. Net insider selling is at 0.25% of market cap and therefore is relatively small. The George Weston Limited owns around 66% of this company. The company is basically controlled by the Weston family. Also, the Loblaw Employee Benefit Plan Trust owns shares worth around $46.8M.

Outstanding shares were increased by 2.131M shares in 2013 for stock options with a book value of $90M. This number of shares was worth $90.3M at the end of 2013 and is 0.75% of the outstanding shares and generally companies with stock options increase outstanding shares by less than 1% for stock options. In 2012, outstanding shares were increased by 0.719M shares for stock options with a book value of $29M. This number of shares was at 0.25% of outstanding shares and was worth $30.5M at the end of 2012.

The 5 year low, median and high median Price/Earnings per Share Ratios are 13.71, 15.99 and 18.27. These are just slightly less than the corresponding 10 year P/E Ratios. The current P/E Ratio is 64.28% based on a stock price $52.71 and 2014 EPS estimate of $0.82.

The problem with this test is that EPS for 2014 is expected to be depressed because of write-offs. The P/E Ratio using 2013 earnings is 23.74 a ratio which suggests that the stock price is expensive. The P/E Ratio using 2015 EPS of $2.99 gets you a P/E Ratio of 17.63. This would suggest a stock price that is reasonable, but at the high end of the reasonableness range.

I get a Graham Price of $23.74. This would be depressed because of the very low EPS expected in 2014 and would result in Price/Graham Price Ratio of 2.22 which shows an expensive stock. If we use 2013's Graham price of $35.24 we would get a P/GP Ratio of 1.50 for a stock price of $52.71. This would suggest also that the stock price is high. (The 10 year low, median and high median P/GP Ratios are 1.05, 1.18 and 1.33.)

I get a 10 year Price/Book Value per Share Ratio of 1.81. The current P/B Ratio is 1.73, a value 4.6% lower and that would suggest that the stock price is reasonable. This P/B Ratio of 1.73 is based on a BVPS of $30.53 and a stock price of $52.71.

Looking at the 5 year median dividend yield of 2.19% and comparing it to the current dividend yield of 1.86%, the current stock price of $52.71 seems reasonable, although at the high end of the reasonableness range. The current dividend yield is some 15% higher than the 5 year median dividend yield.

However, the historical average dividend yield is 1.63% a value that is some 14.4% lower than the current dividend yield of 1.86%. The historical median dividend yield is 1.18% a value some 58% lower than the current dividend yield. This historical testing suggests that the stock price is reasonable to cheap.

When I look at analysts' recommendations, I find Strong Buy, Buy and Hold recommendations. The majority of the recommendations are a Buy and the consensus recommendation would be a Buy. The 12 month consensus stock price is $57.80. This implies a total return of $11.52% with 9.66% from capital gains and 1.86% from dividends.

There is an interesting article about Loblaw selling13 stores and pharmacies to Metro, Jean Coutu Group and Remedy's. There is an interesting article about supply chains at Loblaws and Shoppers in the Canadian Grocer. There is an article dated 2012 where Loblaws says that it has fixed it supply chain problems in the Materials Management and Distribution magazine. You could have fooled me. I still shop at Loblaws because my store has great fresh produce, but if the ginger marmalade I like goes missing from the store, it is not there for months. I go to Metro for this product. If Metro is out of it, it will be back in the store in a couple of days.

Sound bit for Twitter and StockTwits is: Price could be reasonable. By the P/B Ratio test and the dividend yield tests the stock seems reasonable. These tests are sometimes preferable because they are not based on estimates. See my spreadsheet at lob.htm.

This is the second of two parts. The first part was posted on Friday, August 15, 2014 and is available here. The first part talks about the stock and the second part talks about the stock price.

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. Its web site is here Loblaw.

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. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.