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1 Canadian Dividend Growth Company Increasing Dividends

“Dividends may not be the only path for an individual investor’s success, but if there’s a better one, I have yet to find it”

Josh Peters – The Ultimate Dividend Playbook: Income, Insight and Independence for Today’s Investor

Each month I update readers of all the dividend increases in the Canadian Dividend All-Star List (Canadian companies that have increased their dividend for 5 or more years in a row.) along with a brief summary of these companies. Of the 98 companies in the Canadian Dividend All-Star List, only one announced a dividend increase in July 2018. Alimentation Couche-Tard Inc (ATD-A.TO & ATD-B.TO) increased their dividend by 11.1%.

Before I go over the dividend increases in detail there are two questions that should be answered first:

Question 1: Why are dividend increases good?

A dividend increase is a sign from management that they feel good about the future prospects of the company. There is a theory; Dividend Signaling, that suggests that dividend increases generally indicate the stock will perform well in the future. Conversely, the same theory suggests that if the dividend is cut or decreased it is signal that stock won’t perform well.

The Dividend Signaling Theory is a bit controversial but testing of the theory suggest that generally, dividend signaling does occur.

Dividend signaling also makes sense from a common-sense perspective:

  • It is common knowledge that companies that cut or decrease their dividend are typically punished quite severely in the stock market. Companies know this, so they try to avoid increasing the dividend if it isn’t sustainable or think it might have to be decreased in the near future. To try and avoid a dividend cut or decrease, the company will typically only increase the dividend to a sustainable level based on their outlook for the company.
  • Future dividend payments are typically paid for with future cash flows. By increasing the dividend, management is signaling that they think future cash flows will be enough to pay for the increased dividend.

Beyond dividend signaling, there is another reason that dividend increases are good. Dividend growth stocks typically outperform the market.

Companies that regularly increase their dividend typically do better than those that don’t and will typically do so with less volatility. You can see this from the two charts below.

The first chart was from a study done on US stocks in the S&P 500 index and the second chart is of the Canadian dividend aristocrats (Companies that have a history of increasing their dividend each year) vs. a Canadian benchmark index.

The Power of Dividend Growth Chart

S&P TSX Canadian Dividend Aristocrats Performance Chart

Related article: The Number One Reason to be a Dividend Growth Investor (And it’s not what you were expecting)

Question 2: What is the Canadian Dividend All-Star List (CDASL)?

The Canadian Dividend All-Star List is an excel spreadsheet with a lot of stock information on Canadian companies that have increased their dividend for 5 or more calendar years in a row.

It’s a valuable resource that is typically used as a starting point to identify and screen Canadian dividend growth stocks.

The list has been updated monthly since early 2013 and it has come to be one of the most popular parts of the Dividend Growth Investing & Retirement website.

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OK, now on to the dividend increase…

July 2018 Dividend Increase in the Canadian Dividend All-Star List

In total there was only one dividend increase from 98 companies currently in the Canadian Dividend All-Star List during the month of July 2018.

Alimentation Couche-Tard Inc (ATD-A.TO; ATD-B.TO) – 11.1% Dividend Increase

Alimentation Couche-Tard Inc is an international leader in the convenience store industry with a large presence in North America and select parts of Europe (Ireland, Norway, Sweden and Denmark, Estonia, Latvia, Lithuania, and Poland). They also have Circle K licensing agreements in 14 other countries and territories (China, Costa Rica, Egypt, Guam, Honduras, Hong Kong, Indonesia, Macau, Malaysia, Mexico, the Philippines, Saudi Arabia, the United Arab Emirates and Vietnam).

Alimentation Couche-Tard Inc Moto & Worldwide Locations

Source: January 2018 Investor Presentation

Alimentation Couche-Tard Inc. has been paying dividends since 2006 and has a dual-class share structure. Class A shares are mainly held by founders and certain institutional investors and allow for 10 votes per share whereas the Class B shares get one vote per share and are the more actively traded.

Alimentation Couche-Tard Inc which has a dividend streak of 8 years recently increased their quarterly dividend 11.1% from $0.0900 CAD to $0.1000 CAD. This dividend increase comes into effect with the dividend recorded on July 18, 2018. The dividend yield as of July 31, 2018, was 0.7%, and they have 5 and 10-year average annual dividend growth rates of 29.2% and 24.1% respectively.

Alimentation Couche-Tard is a growth stock with acquisitions making up a core part of their growth strategy. You can see from below that they buy up other convenience stores on a regular basis.

Alimentation Couche-Tard Inc Acquisitions

Source: January 2018 Investor Presentation

Historically they’ve done quite well with their acquisitions and the company and its stock price have grown at a fast pace.

As acquisitions make up a core part of their strategy I’m a little leery of their current financial position. Currently, they have a stable BBB credit rating (S&P – BBB stable, Moody’s Baa2 stable). While this is investment grade, I like to see BBB+ or higher. That said, the company has a good history of deleveraging quickly after acquisitions so if the credit rating improves a bit in the future I’d consider them.

Alimentation Couche-Tard Inc Deleveraging track record

Source: January 2018 Investor Presentation

A drawback of the acquisition growth strategy is that it requires a lot of capital which means the company has to maintain a low payout ratio to continue to fund this style of growth. Historically, Couche-Tard’s payout ratio has been around 10-15% of earnings per share (EPS). This has lead to a typically very low dividend yield.

Alimentation Couche-Tard Inc Highest Dividend Yield Table

As you can see a historically high dividend yield for Couche-Tard is around 1.0% to 1.4%. This is going to be too low for most dividend growth investors to get interested.

Despite the low dividend yield, I’m still interested in the stock as they have a remarkable history of growing earnings each and every year. From 2008 to 2018 their EPS has increased every year over the previous year’s EPS and grew by more than 20% on average during this time. It is hard to find that kind of high earnings growth consistency in companies, so it will remain on my radar.

Before I’d consider investing two things need to happen, the credit rating would need to improve to BBB+ and I’d like the dividend yield to get above to 1.0%.

Summary

Monitoring dividend increases is a good idea because it is a sign from management that they feel good about the future prospects of the company.

Dividend signaling; while a slightly controversial theory, suggests that dividend increases generally indicate the stock will perform well in the future. Conversely, the same theory suggests that if the dividend is cut or decreased it is signal that stock won’t perform well.

Dividend growth stocks typically outperform the market. Companies that regularly increase their dividend typically do better than those that don’t and will do so with less volatility.

There was only one July 2018 dividend increase in the Canadian Dividend All-Star List (An excel spreadsheet with a lot of stock information on all Canadian companies that have increased their dividend for 5 or more calendar years in a row.):

  1. Alimentation Couche-Tard Inc (ATD-A.TO; ATD-B.TO) – 11.1% Dividend Increase

Disclosure: I do not own any of the shares mentioned in this article. You can see my portfolio here.

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