Canadian Tire is Paying $7 per Share in Dividends – Time to Buy the Stock?

Canadian Tire stock (TSX:CTC.A) has one of the best dividends in the business, with a dividend at $7 per year. But is that enough?

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published July 26, 2024 9:00 pm EDT

Canadian Tire Corporation (TSX:CTC.A) is perhaps the most well-established retail giant in Canada. The company is renowned for its wide range of automotive, hardware, sports, leisure, and home products.

And yet, shares are down significantly for the stock, thanks to lower revenue and sales. Even so, with a recent annual dividend payout of $7 per share, the company’s dividend yield stands at an attractive 4.9%.

For investors seeking income, such a high dividend yield can be compelling. However, the decision to buy the stock should be informed by a comprehensive analysis of both the company’s financial health and market conditions.

Canadian Red maple leaves seamless wallpaper pattern — Source: Getty Images

Past performance

The recent performance seems to come down to economic instability in general. So how has the company faired before? During the 2008 financial crisis, Canadian Tire demonstrated remarkable resilience. The company’s diversified business model, including automotive, home, and financial services, helped mitigate the impact of the economic downturn. While many retailers struggled, Canadian Tire maintained stable sales and continued to generate profits.

The COVID-19 pandemic also posed significant challenges to the retail sector globally, but Canadian Tire adapted quickly to changing consumer behaviours and operational constraints. Canadian Tire rapidly expanded its e-commerce capabilities, which saw significant growth as consumers shifted to online shopping.

Then there is the general resilience of the stock. The company’s diverse range of products and services provides multiple revenue streams, reducing dependency on any single segment. A well-established brand with a loyal customer base helps maintain sales even during economic hardships. And finally, conservative financial management, including maintaining healthy cash reserves and a manageable debt level, enhances resilience.

Recent performance

Now let’s move forward. Canadian Tire has demonstrated resilience in a challenging retail environment. Despite economic headwinds, the company reported strong sales and earnings growth in recent quarters. For instance, in the fourth quarter of 2023, Canadian Tire’s net earnings were $323.8 million, or $1.15 per diluted share, up from $261.3 million, or $0.91 per diluted share year over year. Additionally, the company’s retail operations have shown robust performance, with a significant increase in comparable store sales.

Meanwhile, Canadian Tire’s dividend payout ratio based on trailing 12 months of earnings is fairly high at 137%. This suggests that the company is paying out more in dividends than it earns, which is unsustainable in the long run. However, the payout ratio based on this year’s estimates is more manageable at 58.6%, and the ratio based on cash flow is 98.3%.

So it looks as though while the last year has been rough, the dividend could still be quite stable – especially as the company continues to see improvements in its bottom and top line.

Further considerations

Before you go ahead and buy up the stock, there are still a few more points to consider. Sure, Canadian Tire holds a dominant market position in Canada, benefiting from a diversified product offering and a strong brand reputation. The company’s strategic initiatives, such as expanding its loyalty program and enhancing its e-commerce platform, have further solidified its competitive advantage. Moreover, Canadian Tire’s real estate investments, particularly through CT REIT, provide a stable income stream and contribute to its overall financial stability.

However, despite its strengths, Canadian Tire faces several risks and challenges. The high payout ratio raises concerns about the sustainability of its dividends, particularly if the company faces unexpected downturns or increased competition. Additionally, the retail sector is highly susceptible to economic cycles, and any significant downturn in consumer spending could negatively impact Canadian Tire’s financial performance.

Bottom line

While Canadian Tire’s $7 per share dividend and attractive yield may appeal to income-focused investors, it is crucial to consider the sustainability of these payouts. The high payout ratio suggests potential risks, and investors should weigh these against the company’s strong market position and financial performance. As always, a diversified investment approach and a thorough analysis of the company’s long-term prospects are recommended before making any investment decisions.