Buy Gold to Hedge Against Inflation

07/17/2008 12:00 am EST

Focus: GLOBAL

Chris Gilchrist

Editor, The IRS Report

The Colabor Group’s hunger for acquisitions shouldn’t slim its generous payouts, writes Paul Tracy in High-Yield International.

Canadian food distributor Colabor Group (Toronto: GCL) operates in a stable sector supported by long-term contracts with its customers. The firm's 8.5% yield is supported by a comfortable dividend-payout ratio, and there's potential for significant growth through acquisitions.

Colabor sells food and non-food products to distributors, which in turn resell those items to supermarkets, convenience stores, and restaurants. Founded in 1962, the company's primary operating area is eastern Canada.

Management is pursuing a four-pronged growth strategy based on expanding its product line, developing private brands, growing its distribution network, and making acquisitions. While all of these are important, acquisitions will be the source of much of the firm's near-term growth.

In February, Colabor closed the acquisition of Les Pecheries Norref Quebec (Norref), a leading importer and distributor of fresh and frozen fish in Quebec and Ottawa. Norref operates a 40,000-square-foot warehouse in Montreal, and sells its seafood products directly to hotels, restaurants, and fishmongers.

Norref's annual sales were C$113 million for the year ending July 31, roughly 10% of Colabor's revenue.

Colabor's management expects that the new acquisition will contribute to earnings this year while increasing the company's profit margins to around 5% to 6%, which is higher than the current 3.5%.

This acquisition is an important step toward management's strategic goal to expand into value-added product categories—specifically, higher-margin, protein-based niches such as seafood and fresh meat.

Management has indicated it will seek to establish a presence in Western Canada by acquiring a strong regional distributor. By expanding its geographic reach, the company will be able to secure contracts on a national level.

The key to the foodservice wholesale and distribution business is scale—the bigger distributors can access the best discounts from suppliers. In addition, larger companies tend to have a larger and better diversified base of customers.

While economic conditions in Canada have been better than in the US, the weakness of the past two years has weighed on results. Colabor's wholesale segment—about 40% of sales—has held up well, with revenues off just 2% year-over-year.

The decline came as no surprise given the increase in unemployment and weak growth in eastern Canada that have caused consumers to cut back on eating out. That's pushed distributors to order smaller quantities of goods from Colabor and draw down their inventories. With the economy improving in 2011, this headwind is beginning to abate.

Colabor pays out a quarterly dividend of C$0.269, equivalent to a yield of 8.5% on an annualized basis. Since the company's 2010 dividend payout ratio was just 77%, down from 82% in 2009, that payout is sustainable.

Continued accretive acquisitions should also help Colabor grow its cash flows and allow the firm to increase its payout in coming years.

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