Shop Right with This Growing Drugstore

03/18/2013 9:45 am EST

Focus: STOCKS

Rising earnings and dividends make this stock a long-term buy, writes John Deman of The Investment Reporter.

Despite its vociferous opposition to drug price reforms, Shoppers Drug Mart (Toronto: SC), Canada’s largest drugstore company, has done reasonably well.

In the year to December 29, Shoppers earned $612 million, or $2.93 a share, up 3.2% from a year earlier. Earnings per share rose more than total earnings because the company bought back 7.95 million of its own shares last year.

In 2012, Shoppers generated sales of $10.782 billion, up by 3.1%. Most important, this increase partly reflected a 2.2% rise in same-store sales.

Shoppers’ higher sales also partly reflected its acquisitions—19 drugstores and three long-term care pharmacies in Western Canada from Paragon Pharmacies, part of a total of 33 drugstore acquisitions during the year.

Shoppers opened 18 new stores (net of relocations of 23 stores), significantly expanded a dozen existing stores, and converted 15 stores to smaller formats. After closing some smaller drugstores, two Murale stores, and a Shoppers Home Health Care store, the net effect was to raise the selling square footage by 3.4% to 13.7 million square feet. The company also picked up market share in Ontario through successful promotional programs.

At the start of 2013, Shoppers operated 1,295 drugstores, 55 Shoppers Simply Pharmacy stores, 62 Shoppers Home Health Care stores, and six Murale stores. Shoppers expects its sales to increase by 3% to 4% this year. Even better, the company expects same-store sales to rise in both divisions: pharmacy same-store sales by 1.5% to 2.5% and front same-store sales by 2% to 2.5%.

It’s expected to earn $3.04 a share this year. Cost and efficiency initiatives across all of the operations will assist the company in growing its earnings.

Shoppers plans to do $275 million of capital spending in 2013—about $193 million of it to renovate and improve existing stores, and greatly expand 15 to 20 of them. The cash will also add 30 to 35 new drugstores, of which half will be relocations of existing ones.

The company expects its retail square footage to grow by 3% in 2013. This could rise further if Shoppers acquires drugstores, if not from acquired prescription files. Shoppers plans to invest the other $82 million into information technology and to improve its supply chain.

Shoppers is also seeking new opportunities, including teaming up with the insurance division of Royal Bank of Canada (RY) to sell travel insurance through Shoppers’ Web site.

Shoppers has just raised its dividend to $1.14 a share. That’s up by 7.5% from 2012. That, in turn, was up from $1 a share in 2011 and 99 cents a share the year before that.

 In 2009 and 2008, Shoppers merely maintained its dividend at 86 cents a share. But maintaining the dividend during the financial crisis and recession was an indicator of prudence and financial strength. Before fiscal 2009, Shoppers raised its dividend each year. So while it’s technically not a "dividend aristocrat," it should become one in 2014.

Shoppers also rewards its shareholders with repurchase programs. It bought back 8,308,900 shares in the year to February 14. Under its new one-year program, the company can buy back up to 10.2 million shares. This should further raise next year’s earnings per share. That typically justifies a higher share price.

With low debt, Shoppers is likely to keep rewarding its shareholders. Shoppers Drug Mart remains a buy for long-term share price gains and increasing dividends, and a current yield of 2.7%.

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