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Jan 4, 2021

Despite COVID, Fundamentals Still Matter Look For Stocks With Increasing Sales, Earnings, Dividends

by Richard Morrison
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Richard MorrisonCOVID and Ottawa’s reactions to it have created ripples across Canada’s investment landscape. With no inflation to fight, the Bank of Canada has kept interest rates low, which helps corporations’ financial results. The low interest rates also mean minuscule returns from bonds and the funds that hold them, causing some investors to allocate more of their portfolios toward stock markets. Finally, since gold always rises in times of crisis, the resource-heavy TSX Composite index has benefited.

These factors helped the index recover after last year’s COVID-induced selloff. The pandemic seems to have distracted investors from their traditional focus on fundamentals, however, as many high-flyers seem to be riding on hope and only a handful of stocks have climbed via improving fundamentals. The short list of stocks rising on steadily increasing revenue and earnings includes online retail giant Shopify and a few mining companies, together with the three companies mentioned here.

A variety of online stock screeners show that among two dozen or so large, dividend-paying Canadian companies—Shopify does not pay a dividend—only five that had climbed by more than 15% over the past year and 40% over the past five years also had one- and five-year growth in profits and earnings per share of more than five per cent.

For the three companies mentioned here, rising sales, earnings and dividends have helped provide solid total returns to investors every year for many years. In my opinion, these names should continue to outperform even after a safe and effective vaccination for COVID is in widespread use. Of course, their prices will fluctuate, past return is no guarantee of future performance and you should do further research. I do not own any shares in these companies.

Empire Co.

Empire, based in Stellarton, NB, owns or franchises more than 1,500 stores under the banners Sobeys, Safeway, IGA, Foodland, FreshCo., Thrifty Foods, Farm Boy, Lawtons Drugs, and more than 350 retail fuel locations. The company owns and operates grocery e-commerce under banners Voilà, Sobeys, IGA.net and Thrifty Foods.com. Empire has about $27.2 billion in annual sales, $14.8 billion in assets and employs about 127,000 people.

The company’s non-voting shares have more than doubled over the past four years, rising from $16 at the end of 2016 to $36 by late 2020. Earnings have fuelled the rise as adjusted net earnings have a Compound Annual Growth Rate (CAGR) of 46.1% over the past three years.

As the pandemic set in and restaurants closed last year, Canadians flocked to supermarkets and filled their shopping carts with enough provisions for an expedition to the South Pole, helping grocery chains’ sales and earnings. Empire stock was relatively resilient during COVID, slipping 10% during the plunge before recovering to outperform competitors Metro Inc., Loblaw and George Weston, along with the TSX Composite.

On 10 September 2020, Empire reported strong results for the first quarter of its fiscal 2021 year, as net earnings grew by 47% on a nine per cent increase in sales.

Empire earned $191.9 million or 71c per share on sales of $7.35 billion, up 47% from profit of $130.6 million (48c) on sales of $6.74 billion for the same quarter of 2019. In the first quarter of fiscal 2021, the company launched a three-year growth plan called Project Horizon, aimed at expanding its market share and with the goal of improving annualized Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) by $500 million by fiscal 2023.

COVID makes it impossible to predict sales in the medium term, Empire’s accompanying press release said. “Management continues to anticipate that even as Canadians return to work and school, that a percentage of the consumption that has shifted from restaurants and hospitality businesses to grocery stores will remain in grocery stores.”

In a 25 October 2020 report, Peter Sklar, a BMO Capital Markets analyst, said Empire shares were undervalued, setting an outperform rating on the stock with a $41 target price. Empire’s Voilà.ca online shopping site is a positive for the company’s future growth as it attracts younger shoppers in the early family formation stage of life, Mr. Sklar said.

Morningstar’s quantitative earnings report set a late-November fair value for the shares at $40.82. The company’s balance sheet is strong, with $1.077 billion in cash and cash equivalents together with access to about $770 million in credit facilities.

Empire has steadily increased its annual dividend, most recently to 52c a share from 48c last July, yielding 1.4%.

Goeasy (GSY)

Goeasy, based in Mississauga, ON., offers loans and lease-to-own consumer products to non-prime borrowers who cannot access credit from banks. The company has more than 400 locations and 2,000 employees in its two divisions: Easyfinancial, which offers unsecured and real estate-secured installment loans from $500 to $45,000 at interest rates starting at 19.99%, and easyhome, which offers furniture and appliances on weekly or monthly lease-to-own terms at 29.99%. One in three customers improve their credit ratings to prime and 60% increase their credit score within 12 months of borrowing from the company, Goeasy’s site says.

Goeasy shareholders who held on through last year’s plunge have been rewarded as the share price has dramatically outperformed the TSX, having more than tripled from $24 over the past four years. When dividends are added in, total return on Goeasy has been between 30% and 40% every year over the past five years as revenue, net income, earnings per share and the dividend have all grown steadily. The company’s investor presentation goes even further, boasting of 18 consecutive years of revenue and earnings growth, with a 13.1% CAGR in revenue, a 30.1% CAGR in normalized net income and a 23.8% CAGR in normalized diluted earnings per share over since 2001. Total shareholder return, including dividends, was 7,452% since 2001, the company’s presentation says.

On 3 November 2020, Goeasy reported record Q3 results as the economy reopened and the company originated more loans, with fewer credit losses. Revenue for the third quarter was relatively flat at $162 million, up four per cent over the same period in 2019. Net income, however, was a record $33.1 million, up 67% from $19.8 million in the same quarter of 2019. Diluted earnings per share jumped to $2.09, up 63% from the $1.28 in the third quarter of 2019. Goeasy’s total assets were $1.37 billion as of 30 September 2020, up 10% from $1.24 billion in 2019, driven by the growth in the company’s loan portfolio.

The company increased its dividend by a full 45% to $1.80 from $1.24, the sixth consecutive increase since 2014. The dividend now yields about 2.1%.

TFI International Inc. (TFII)

If you see a transport truck on the highway, there is a good chance it’s from one of TFI’s network of more than 80 trucking companies that operate in Canada, the United States and Mexico. TFI operates in four segments: truckload, less-than-truckload (LTL), package and courier and logistics. The company’s latest investor presentation says it has 16,754 employees, including 8,432 drivers, 18,500 tractors and 25,720 trailers operating from 368 facilities. TFI grows mainly by acquiring smaller businesses, having made 88 acquisitions since 2008.

TFI’s shares have more than tripled in the past four years, and more than doubled between their March low and the end of November 2020. The company’s investor presentation says total return including dividends were 41% over one year, 164% over five years, 596% over 10 years and 634% over 15 years.

In the company’s third quarter ended 30 September 2020, TFI’s earnings and earnings per share climbed as revenue slipped. Total revenue of $1.25 billion was down 4% from the same quarter of 2019. However, net income from continuing operations was $110.7 million or $1.19 per share, up 34% compared to the $82.6 million (98c) recorded in the same quarter of 2019. The profit improvement came from improved contributions from operations and smaller interest payments as a result of lower debt.

TFI has consistently raised its dividend. The latest, a 12% increase announced this fall, lifted the annual payout to $1.16 per share to yield about 1.75%.

Conclusion

Although there are still some laggards, the share prices of dozens of large Canadian companies have recovered since the COVID-induced plunge last March. As always during a time of crisis, the pessimists and other nervous investors have bought into gold miners, while technology stocks have benefited from the COVID-induced global trend toward staying home to work, shop and socialize online. Canadian marijuana stocks have also come alive lately in hopes that a democratic government in the United States will legalize cannabis, and the share prices of a few Canadian drug developers have jumped as well. Relatively few Canadian companies that had increased their revenue, earnings, and dividends over the long-term continued the trend throughout the pandemic, however. In my opinion, their solid long-term fundamentals should help these three names to keep outperforming the TSX Composite after COVID is brought under control.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca