Monday, November 13, 2017

Dollarama Inc.

Sound bite for Twitter and StockTwits is: Negative Book Value. I think the price on this stock is stupid. The Price/Graham Price Ratio is 26.12 a rather ludicrous number. The book value is negative. The dividend yield is so low you got to wonder if this should be called a dividend paying stock. Risk is high with high debt and negative book value. A recession or wrong movement and this company could be in trouble. It is currently profitable, but insiders are selling. See my spreadsheet on Dollarama Inc.

I do not own this stock of Dollarama Inc. (TSX-DOL, OTC-DLMAF). I started to review some of the stock recommended by Jennifer Dowty from a column she wrote and I reviewed in February 2010 on Dividends and Special Dividends. The title of the article in Investor's Digest was Dividend Stocks: Buy, Hold and Collect. Jennifer is now a Portfolio Manager for Manulife Asset Management Limited.

What I noticed on updating the spreadsheet is that they went into debt in order to buy back over 7.4M shares. They also spend all their earnings on buying back shares. They have been buying back shares since2014 but this is only the second year it has severely affected the book value. Because of this the Book Value has declined from $740.5M of 2015 to $466.9M of 2016 and now $100.3M of 2017. In the second quarter of 2017 it has hit a negative value of $59.4M.

Book Value is has declined by 32% and 4% per year over the past 5 and 10 years. Decline in the last two years was at -33 % and 77%. More shares were bought in the first two quarters of 2017. This left the Book Value at a negative value of $59.4M and a decline of 160%. The Book Value is the theoretical breakup value of a company. I personally do not like companies with negative book values.

Declining shares tend to make the growth in EPS or any per share value look better than it really is. Net Income has gone up by 20.8% per year or 157% over the past 5 years. EPS has gone up by 26.4% per year or 223%.

A declining Book Value can make the Return on Equity look better than what it is. It is bad when you have a high ROE and declining book value. The ROE for 2016 is 39.9%. This is very much inflated by declining Book Value. Too high ROE can be a sign of problems with a company.

Another thing to point out is that the Rossy family that started this company is selling off shares. When I look at this stock last year, Neil George Rossy, the CEO has 2.529M shares, now he has 1.08M shares. He used to own some 2.2% of the company and now is holds 1%. Lawrence Rossy, the chairman last year had 11.1M Shares and now he has 7.12M shares. He used to own 9.8% of the company and now he owns 6.3%. Insider selling last year and this year is at 0.08%. This is high. You expect it to be around 0.1% or lower.

The 5 year low, median and high median Price/Earnings per Share Ratios are 15.58, 24.96 and 36.15. The 8 year corresponding ratios are 15.94, 20.01 and 24.07. The current ratio is 33.42 based on a stock price of $145.39 and 2017 EPS estimate of $.35. This stock price testing suggests that the stock price is relatively expensive. This is a consumer stock and P/E Ratios are too high.

Problem is that you cannot calculate a Graham Number when the book value is negative. The closes I can get is a value of $5.57 using the latest positive Book Value of$35.6M and Book Value per Share of $0.32. The 10 year low, median and high median Price/Graham Price Ratios are 1.70, 2.13 and 2.57. These are very high for a consumer stock. The current P/GP 26.12 based on a stock price of $145.39. This stock price testing suggests that the stock price is relatively expensive.

I cannot test the stock price using the book value because the book value is negative.

The historical dividend yield is 0.61%. The current dividend yield is 0.30% a value some 50% lower. The current dividend yield is based on dividends of $0.44 and a stock price of $145.39. This stock price testing suggests that the stock price is relatively expensive.

The 8 year Price/Sales (Revenue) Ratio is 2.16. The current P/S Ratio is 4.97 based on a stock price of $145.39, 2017 Sales estimate of $3288M and Sales per Share of $29.27. The current ratio is some 130% higher than the 8 year ratio. This stock price testing suggests that the stock price is relatively expensive.

When I look at analysts' recommendations I find Strong Buy, Buy and Hold. Most are a Buy and the consensus would be a Buy. The 12 month stock price is $146.93. This implies a total return of $1.36% with 1.06% from capital gains and 0.30% from dividends.

Prajakta Dhopade at Maclean's Magazine talks about competition from Japan for Dollarama. Ryan Goldsman on Motley Fool says stock is so profitable it is scary. David Jagielski on Motley Fool is more cautious. See what analysts are saying on Stock Chase. They mostly say it is pricey.

Dollarama is a major player in the value retail industry. Headquartered in Montreal, Dollarama owns and operates over 1,000 stores across all ten Canadian provinces. All stores are corporately owned and operated. Its web site is here Dollarama Inc.

The last stock I wrote about was about was Encana Corp. (TSX-ECA, NYSE-ECA)... learn more. The next stock I will write about will be Keyera Corp. (TSX-KEY, OTC-KEYUF)... learn more on Wednesday, November 15, 2017 around 5 pm. Tomorrow on my other blog I will write about Money Show 2017 - Ryan Modesto... learn more on Tuesday, November 14, 2017 around 5 pm.

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. I have three blogs. The first talks only about specific stocks and is called Investment Talk. The second one contains information on mostly investing and is called Investing Economics Mostly. My last blog is for my book reviews and it is called Non-Fiction Mostly. Follow me on Twitter or StockTwits. I am on Instagram. Or you can just Google #walktoronto spbrunner8166 to see my pictures.


  1. Hi Susan,
    My daughter is a nurse in her mid twenties and has topped up her tfsa with canadian dividend stocks. She will continue to put the maximum allowable amount in her tfsa going forward. She also wants to invest in a non registered account starting next year with canadian dividend purchases. In your opinion, should she contribute to an RRSP instead of a non registered acccount? Since she has a half decent pension as a nurse, she says she may as well pay the tax now instead of later when she retires. I'm interested in your opinion.

    1. I did not have a pension plan, but I did have an RRSP. When I stopped working half was in a non-registered account and half was in an RRSP.

      I made too much money on my RRSP investments and now most of it goes to pay taxes. I ended up not saving much in taxes when I paid into my RRSP, but am paying taxes at the top rate taking it out. This was not how it was supposed to be.

  2. "insider selling last year and this year is at 0.08%. This is high. You expect it to be around 0.1% or lower. "

    you probably mean insider holding.

  3. Awesome Blog Susan! Just stumbled upon it this morning. Reading the above on Dollarama. Just a few (hopefully constructive) thoughts on the above analysis:

    1. "Declining shares tend to make the growth in EPS or any per share value look better than it really is." - I can't agree with this... generally, a declining share count is excellent, assuming that the company isn't going into TOO MUCH debt for buy backs. If a company like Dollarama is consistently buying back and cancelling their stock, I am all ears. Also, a declining share count doesn't make earnings per share look better than it actually is ... Buy backs do boost earnings per share but that is because the company is return capital to shareholders, which is awesome. This is what you should want...

    2. "It is bad when you have a high ROE and declining book value." - unfortunately have to kindly disagree with this as well. What is important is why you have a declining book value - is it because you are loosing money? or is it because you are buying back stock? If you have a high ROE and a declining book book value that is sometimes an awesome sign. In Dollarama's case, that is exactly what it is. They simply are returning loads of money back to shareholders via buy-backs. Dollarama's ROE measure is the cumulative effect of this. If you are generating lots of earnings and overtime have earned enough to basically pay back the cumulative shareholders capital invested, ROE will be very high and book value will be declining. This is an excellent outcome for Dollarama...

    Anyways, just my thoughts!