Boring, But a Winner for Shareholders

02/28/2013 9:45 am EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape of The Canada Report found a great stock within easy driving distance, and it combines a growing dividend with appreciation potential.

Over the years, I have been periodically reminded about the value of simply looking around you when searching for investment ideas. It happened again last week when I did the family grocery shopping in our local Metro (Toronto: MRU) store.

All the checkout counters had long lines, and I realized that was the case almost every time I went in. So when I got home, I took a close look at the company's fundamentals. I liked what I saw.

Montreal-based Metro traces its roots back to the late 1940s, when a small group of Quebec food retailers banded together to act as a single buyer in acquiring products from wholesalers at better prices, in order to compete with the major chains of the day.

The company made a number of acquisitions over the years, but the big breakout came in 2005, when Metro invested $1.7 billion to buy out all the A&P Stores in Canada, thus giving it a national profile and a 24% share of the Ontario market.

Today, Metro has annual sales of more than $11 billion. The company is a leader in food and pharmaceutical retailing in Quebec and Ontario, and operates a network of more than 600 food stores under several banners, including Metro, Metro Plus, Super C, and Food Basics, as well as over 250 drugstores under the Brunet, The Pharmacy, and Drug Basics banners.

This has sometimes been referred to as a boring company, but it has done very well for its investors. Over the past year, the shares have moved up nicely from the $45 range, and continue to trade above 50- and 200-day moving averages.

Grocery chains aren't normally seen as having much growth potential because of their thin margins, but this stock is up over 20% in the past year. There is more upside potential from here, plus investors receive a modest dividend.

Because of the nature of its business, it generates a lot of revenue—just over $12 billion in 2012. And it is comfortably profitable, with earnings per share of $5.09 over the latest 12-month period.

Metro recently reported strong results for the first quarter of fiscal 2013, with net earnings of $121.4 million ($1.23 a share), compared to $103.7 million ($1.01 per share) for the same period a year ago. Sales were slightly over $2.7 billion, up 2.7% from a year ago.

The company also raised the dividend by 16.3%, to 25 cents per quarter. At the current price, the stock yields 1.6%. The company has increased its dividend every year since 2003.

Metro also continues to buy back its shares in the open market, purchasing just over 1.2 million shares between September 10 and January 18.

Although the business is relatively recession-proof, a serious economic downturn would inevitably have an impact on sales. Also, Metro faces a lot of competition, not only from well established Canadian food retailers like Loblaw, but also US giants such as Walmart (WMT) and Target (TGT). (The latter is about to make its debut in Canada.)

That said, Metro has shown an ability to meet competitive challenges in the past, and should be able to continue to do so. Buy.

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