Canadian Tire (TSE: CTC.A), a retailer of home goods, sporting equipment, apparel, footwear, automotive parts, and more, currently has a Strong Buy consensus rating from analysts. Also, with a 4.85% dividend yield that has been growing at a respectable pace, the stock may be worth buying at current levels. Let’s dive deeper.
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Is Canadian Tire a High-Quality Stock?
CTC.A looks like a high-quality stock for a few reasons. For starters, it’s a consistently-profitable company. Canadian Tire’s average return on equity (ROE) from 2017 to 2021 was 17.9%, and its ROE for the trailing 12 months is nearly 20% and has been trending higher for the most part in the past decade. This classifies Canadian Tire as very profitable since it’s generating $0.20 in value per year for every $1 of equity.
Also, its earnings per share have grown at an 11% compound annual growth rate (CAGR) over the past five years, while its dividend per share has grown by 17.6% per year over the same period. Revenue per share has also seen solid annual growth of 8.6%. Poorly-run companies don’t often grow consistently like this, at least not on a per-share basis.
Canadian Tire’s Dividend and Buybacks are Solid
CTC.A has been growing its dividend for the past 12 years in a row, and it looks safe because its payout ratio is currently 30%. Even its free cash flow payout ratio averaged 32.6% between 2017 and 2022. This gives the company lots of room to increase its dividend or use the remaining earnings for buybacks.
Using its cash flow, Canadian Tire has managed to buy back a significant amount of shares over the past decade, reducing its share count from 81.4 million in 2012 to 58.6 million as of its most recent report.
Its five-year average buyback yield is 3.4%, and since the company is trading at a relatively low valuation now, buybacks can potentially increase. In fact, its buyback yield this year is 4.8%. Combined with the 4.85% dividend yield, investors are getting solid returns.
What is the Price Target for Canadian Tire Stock?
Based on analyst price targets, Canadian Tire’s average price target is C$188.57, implying 32.6% upside potential. Seven analysts rate it a Buy, while one has a Hold rating, giving the stock a Strong Buy consensus rating.
The Takeaway: Canadian Tire Stock Looks Attractive
While it’s not the most enticing value proposition in the market right now, CTC.A stock does look undervalued. CT’s earnings are forecast to fall about 8% this year and remain flat in 2023 before increasing again, but the company’s forward P/E ratio (based on 2022 estimates) of 8x looks low. Its dividend could continue growing by 10%+ per year in the medium term based on the company’s low payout ratio, and share buybacks done at its current low valuation should also provide value for shareholders.
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