Now that inflation has cooled off and interest rates are beginning to decline many Canadian investors are taking advantage of the opportunity and buying high-quality stocks while they’re still cheap. Therefore, there’s no doubt that many investors will be asking themselves if they should buy Canadian Tire (TSX:CTC.A) stock today, especially with its 4.4% dividend yield.
Canadian Tire is one of the best-known brands and highest-quality stocks in Canada. It’s an especially high-quality retail stock considering its massive footprint, portfolio of diversified brands, and significant loyalty program.
Therefore, there’s no doubt many investors will want to buy and hold Canadian Tire for the long haul. However, the question is whether it’s worth buying today. So let’s look at Canadian Tire’s operations, near-term potential, and valuation to determine if it’s one of the best stocks to buy now, while its dividend yield sits at roughly 4.4%.
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Why is Canadian Tire such a high-quality stock?
Over the past year, Canadian Tire has faced some significant challenges, like most retailers, due to a drop in consumer spending and the impact of higher interest rates. These headwinds, along with some seasonal fluctuations, affected its profitability and, consequently, its share price performance.
However, with inflation cooling and interest rates starting to decline, the company seems to be putting these issues behind it, setting the stage for a brighter future and creating an excellent opportunity for investors to buy one of the best stocks in Canada right now.
What makes Canadian Tire such a high-quality stock today is its well-established brand, long-term growth potential, and impressive loyalty program. The Triangle Rewards program, which has millions of members, first and foremost helps to drive significant repeat sales.
However, it’s also crucial for Canadian Tire because it provides valuable insights into customer behaviour as well. This not only helps to boost its bottom line but also allows Canadian Tire to refine its marketing strategies and improve efficiency.
Additionally, Canadian Tire has continued to grow its e-commerce business, which has become a crucial part of its operations. While the company is known for its physical stores across the country, its online platform plays a vital role in both attracting more customers and driving sales.
Therefore, by successfully blending its brick-and-mortar stores with an expanding digital presence, Canadian Tire can cater to a wide range of consumers and keep up with modern shopping trends.
So, although Canadian Tire’s 4.4% dividend yield is certainly compelling, the stock is worth buying for much more than just the passive income it generates.
Is the popular Canadian retailer trading undervalued?
After Canadian Tire stock was impacted heavily by the worsening economic environment last year, its normalized earnings per share (EPS) fell to just $10.37, down over 40% from 2022. The good news for investors, though, is that even with its significant decline in interest rates, the stock still earned enough to cover its $7 in annual dividend payments per share.
Furthermore, the stock is already recovering, and analysts expect its normalized EPS to increase by more than 17% this year to $12.16. Moreover, analysts also expect its normalized EPS to climb by more than 11.5% next year to roughly $13.58.
So, with Canadian Tire stock trading around $158.50 at the time of writing, it currently trades at a forward price-to-earnings (P/E) ratio of just 12.7 times and just 11.6 times its expected earnings in 2025.
For comparison, Canadian Tire’s 10-year average P/E ratio is 12.6 times, showing that even after its strong recovery in the last few months, Canadian Tire still trades slightly undervalued.
It’s also worth mentioning that its current dividend yield of 4.4% is also above its historical average. In the last five years Canadian Tire’s forward yield has averaged 3.7%, and over the last 10 years it’s averaged just 2.9%.
Therefore, if you’re wondering whether Canadian Tire stock is worth buying today, it’s certainly one of the best long-term growth stocks in Canada, offering much more than just a compelling dividend yield.
