A Canadian Dividend Paying Gem

| About: North West (NWTUF)

Summary

Shares have a Beta of only 0.11.

Earnings and dividends have been very consistent.

Defensive company with an attractive valuation.

For several years, I've followed the shares of Canadian retailer NorthWest Company (OTC:NWTUF) or NWC on the Toronto Stock Exchange. A much smaller company with a market capitalization of just about $1.2 billion CDN, they operate grocery stores, or what was in a small community is a general store. They sell everything.

All numbers in this article are in CDN dollars unless otherwise stated.

Wanting to conduct the analysis for quite some time, one of the most difficult things to find for Canadian companies is the historical information. Although NWC has an abundance of it in their annual report, it was only after I received the information from NWC that I was able to begin the analysis.

The beauty of dealing with smaller companies, is the ability to contact the CEO directly when the investor relations department fails to respond. Thank you Mr. Kennedy. As a long time employee of NWC (since 1989), he is clearly well tenured and has occupied his current role since 1997. A very long tenure for a CEO.

The long tenure of the CEO is nothing to be surprised about. NWC is nothing if not consistent. With a beta of just 0.11 according to Google Finance, it's one of the least volatile stocks I've ever found. Not surprisingly, it pays a dividend - a good dividend. Although the swings in the past few weeks have been larger than the norm, the long term trend is very clear - consistent and boring.

The company reported a challenging competitive environment during their last conference call, hence the out of ordinary decline in price. Regardless of this, I expect the consistency of NWC to continue.

Looking at the business, the company operates stores mainly in remote locations in Canada and Alaska. There are a few other locations in other countries, but the bulk of the stores are in the north. The beauty of this situation is the power of the buyers vs. the power of NWC. In more remote areas, there is often only one competitor is any. NWC has some degree of pricing power not available to other retailers. This is what a shareholder wants to see.

The distribution is something they obviously have to control, flying in the goods to be sold in their stores. The business is extremely consistent. Looking at the revenues and earnings quarter over quarter for the past few years, we see what is clearly a defensive security. NWC is a retailer. All tables were made by the author with the information pulled from NWC's annual reports. The top line is the revenues while the EPS are earnings per share.

Q1

Q2

Q3

Q4

Total

Year 2016

Rev.

438970

460570

$

899540

N/A

N/A

0.00

0.00

%

EPS

0.36

0.34

$

0.70

51.43

48.57

0.00

0.00

%

Year 2015

Rev.

414038

448736

458049

475212

$

1796035

23.05

24.98

25.50

26.46

%

EPS

0.32

0.37

0.43

0.31

$

1.43

22.38

25.87

30.07

21.68

%

Year 2014

Rev.

376257

401127

413512

433504

$

1624400

23.16

24.69

25.46

26.69

%

EPS

0.26

0.35

0.37

0.31

$

1.29

20.16

27.13

28.68

24.03

%

Year 2013

Rev.

364474

388610

387173

402868

$

1543125

23.62

25.18

25.09

26.11

%

EPS

0.27

0.37

0.36

0.33

$

1.33

20.30

27.82

27.07

24.81

%

Year 2012

Rev.

365517

383843

377664

386622

$

1513646

24.15

25.36

24.95

25.54

%

EPS

0.27

0.37

0.36

0.32

$

1.32

20.45

28.03

27.27

24.24

%

Click to enlarge

With a year end of December 31 st, the company has been extremely consistent with a higher than anticipated EPS beat for the third quarter of 2015. This coincided with the decline in oil prices and the decline in the Canadian dollar. A little extra profit.

In reality, the profits have been so consistent, the company has been able to maintain a rather high dividend payout ratio. Let's take a look at the dividend payout ratio and yield information from past years. The EPS of $1.35 is an estimate for 2016.

Annual Dividend

Share Price

Yield as a %

EPS

Payout Ratio %

High

Low

High

Low

Year 2016

33.00

25.15

1.24

3.76

4.93

1.35

91.85

Year 2015

30.53

23.41

1.20

3.93

5.13

1.43

83.92

Year 2014

26.74

21.93

1.16

4.34

5.29

1.29

89.92

Year 2013

29.00

22.34

1.12

3.86

5.01

1.32

84.85

Year 2012

23.88

19.34

1.04

4.36

5.38

1.32

78.79

Year 2011

22.50

17.85

1.05

4.67

5.88

1.19

88.24

Click to enlarge

Waiting for the shares of NWC to yield 5% may not be a bad time to jump in. According to the dividend yield, the buy in price seem to bottom out around a 5% yield almost every year. The P/E ratio, year-over-year is just as consistent. Let's take a look. Again, the EPS of $1.35 is an estimate.

Share Price

Shares Out.

Price / Earnings

EPS

High

Low

High

Low

Year 2016

33.00

25.15

48.52

24.44

18.63

1.35

Year 2015

30.53

23.41

48.52

21.35

16.37

1.43

Year 2014

26.74

21.93

48.50

20.73

17.00

1.29

Year 2013

29.00

22.34

48.43

21.97

16.92

1.32

Year 2012

23.88

19.34

48.39

18.09

14.65

1.32

Year 2011

22.50

17.85

48.38

18.91

15.00

1.19

Click to enlarge

Clearly, the EPS as well as the total number of shares outstanding have been very consistent over the past 5 years. The company is clearly not into financial engineering or able to do creative things. The company's management has committed to paying a rather high dividend. The downside is what we can now interpret as a restriction in the growth of the dividend. The payout ratio is already very high and there is no money for future expansion. There is no money for a share buyback.

Although there is clear opportunity in NWC at a current price of just over $25 per share, this stock is probably the least exciting security I've found all year. The debt has increased little by little every year, with the stock price following. Effectively, the capital structure has remained consistent at 15% to 20% debt and 80% to 85% equity. The current ratio is as of the end of 2015, 2.15. As of the end of Q2, 2016, it was 2.35, the highest it's been going back to at least 2006, (I have not gone back further than 2006).

With $43 Million in Cash, the annual dividend should take up about $60 Million. Clearly, the money has to keep rolling in. The average CFO for the past 3 years has been $109 Million with an average of almost $37 Million going into working capital (or inventory). Eventually, the shelves become fully stocked and CFO will increase further. Hopefully the cash (down the road) will be used to either pay back debt or buyback shares (or both).

Lastly, looking at the 3 Step Dupont model, the word which comes to mind yet again is the same: consistency.

PROFIT MARGIN

ASSET TURNOVER

FINANCIAL LEVERAGE

Net Income / Sales

Sales / AVG Total Assets

AVG Total Assets / Average SE

ROE

Year 2015

70

1796

759

1796

759

343

0.0389

2.3662

2.2101

0.2032

Year 2014

63

1624

697

1624

697

326

0.0387

2.3292

2.1402

0.1930

Year 2013

64

1543

661

1543

661

309

0.0416

2.3347

2.1366

0.2077

Year 2012

64

1514

639

1514

639

290

0.0422

2.3682

2.2041

0.2203

Year 2011

58

1495

622

1495

622

285

0.0388

2.4047

2.1809

0.2033

Click to enlarge

It seems the capital structure is well in place with the financial leverage ratio between 2.13 and 2.21. It's steady all over with a slightly decreasing asset turnover and a very consistent profit margin.

Expectations

Never having seen a company as consistent as NWC, I believe the one year holding period return should be 20% to 25%. Assuming you buy at $25 and sell at $30, the price return will be 20% in addition to the dividend.

Expectations in this particular security should be tapered, the reality is this is a security which is a consistent as they come. Although the returns will not be astronomical, NWC is a defensive company which weathered the storm in 2008 and 2009 better than most. I expect next time to be no different.

Disclosure: I am/we are long NWTUF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long through NWC on the TSE.