This past week, shares of Canadian Tire Corporation Limited (TSX:CTC.A) fell from a price of $175 to close the week at $162.47 — and made many shareholders much worse off along the way.
Although many investors have lost a substantial amount of money, the good news (for those who are not yet shareholders) is that there is now a new opportunity available at current prices. As the security currently offers a dividend yield of 2.2%, many income investors are beginning to get very excited. In spite of 2.2% not being very generous, this yield is better than the risk free rate of return and can be converted to cash on very short notice.
As the retail industry has been steadily shrinking for several years, numerous bankruptcy sales have put downward pressure on prices. In spite of what remains a challenging environment, investors may now be in the best possible position to get a “steal of a deal.”
Before jumping in feet first, it is imperative to consider just what we’re buying into. As a big box retailer with a coast-to-coast presence, the company has an excellent chain of distribution and a well-established presence in the market. Over the past decade, however, the environment has been very challenging, as many competing firms have tried various ways to reinvent themselves and shift their footprint away from bricks and mortar onto the online channel. Much confusion has resulted at the customer level in an industry that has seen many competitors disappear altogether.
Customers walking along a street with a dozen coffee shops should now feel very powerful, as they have the freedom to choose which one they’ll give their money to.
Conversely, Canadian Tire has survived long enough to outlive the competition and in many cases appears to be the only game in town. In addition to the retail stores, a number of expansions including Mark’s (L’équipeur) have paid off very well. This case should be no different.
The question that investors need to ask themselves currently is this: what price are will prompt them to take the leap? In an industry that will become dominated by only a few bricks and mortar providers in the next few years (Sears has already closed down) and will see many independent hardware and sports stores will follow suit, the potential to attract new customers and increase margins will make the growth in earnings much easier. Shareholders should expect big things from the dividend growth to the top and bottom lines. In addition, the company has demonstrated its willingness to repurchase shares as the situation allows.
Just how high this eagle will fly remains to be seen!
