I hope everyone is enjoying their Labour Day long weekend. I took a little vacation by having a mini-golf outing and enjoyed delicious Korean food with friends. Now, back to a cheap dividend stock with a decent dividend yield.
Investment-grade retailer Canadian Tire (TSX:CTC.A) isn’t doing well from high inflation and rising interest rates because both lead to lower consumer spending and is a drag on results.
The dividend stock has been in a downward trend since peaking in May 2021 after a tremendous run from about 140% from the pandemic market crash bottom.
2021 results are hard to beat. Canadian Tire had a 45% jump in adjusted earnings per share (EPS), which is a far cry from a normal growth rate. This is why its year-to-date net income dropped 11% versus the same period last year. Normalized diluted EPS saw a more palatable drop of 2% to $6.16.
Its gross profit margin improved to 34.7% in the trailing 12 months (TTM) versus 33.5% in the base year of 2019. Management is also managing operating expenses well which was 23.75% of revenue in the TTM vs. 23.65% in 2019 despite many businesses complain about higher transportation and labour costs.
Canadian Tire is one of the oldest retailers in Canada. It’s 100 years old! Canadian Tire provides a diversified assortment of products across more than 500 retail locations in Canada.
It has expanded into an umbrella of brands, including sports retailer SportChek, casual clothing and workwear retailer Mark’s, party and celebration retailer Party City, and autoparts chain PartSource.
Importantly, Canadian Tire has been a dividend payer for 77 years. Its 15-year dividend growth rate of 14.2% is also impressive, although the rate has been lumpy. In the period, the growth rate was as low as 0% to as high as 38%.
Now that Canadian Tire stock trades at about 8.4 times earnings and yields 4.1%, it may be a good time to nibble some shares.
The retailer’s 10-year EPS growth rate is 12.7%, and its long-term normal P/E is about 13.1. Assuming a 7% EPS growth rate and a target P/E of 11, its three- to five-year total returns would be 15-20% per year.
The market sentiment on Canadian Tire is not positive, though. No one has a crystal ball on how long the downward trend may continue. In the long run, though, it’s usually not a bad idea to pick up decent yield dividend stocks that pay safe dividends when they appear to be cheap.
What do you think? Would you buy or avoid Canadian Tire?
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Disclosure: As of writing, we didn’t own any stocks mentioned.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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