Shoppers Drug Mart: Drugs and Increasing Dividends

Feb. 7.08 | About: Shoppers Drug (SHDMF)

The largest pharmacy chain in Canada, Shoppers Drug Mart (OTCPK:SHDMF), has raised it's dividend by almost 35%. The company raised the annual pay out on the back of a 16% rise in 4th quarter profit, and same store sales growth of 3.9%. Sales of the company's private label, and exclusive brands rose an astonishing 16.1%. I guess people are really buying up the 'Life' brand.

Considering that the dividend raise was double the EPS growth rate, this tells me something about the stock Shoppers wants to become. This company seems to really be putting an emphasis on dividend growth, and is trying to make themselves into more of a dividend play. Even after this dividend raise the yield is still relatively low at around 1.7%, but if Shoppers continues to raise dividends faster than EPS growth then its pay out ratio will rise, and the company may attract more dividend investors as its yield climbs up to the 2.5% - 3.5% range. Perhaps the company is looking into the future and seeing the reality that it may reach the saturation level sooner rather than later, and its growth is bound to slow.

After going through the Walgreen (WAG) experience it is easy to see that Shoppers is currently sitting on a precarious valuation perch of 23x earnings. It is inevitable that the company will report a weak earnings growth quarter at some point, and the stock will likely get knocked down hard. This could be a wonderful buying opportunity for long term investors, as I believe currently exists with Walgreens. You can be assured that this stock will not demand premium P/E forever, but it's always difficlult to know when it will shrink, and by how much.

Right now, the stock looks like a fabulous buy whenever the shares dip below $48 or so, but this is assuming that its torrid rate of earnings growth continues unabatted. Even if the P/E shrinks, this entire industry has the tailwind of demographics blowing at its back. As the baby boomers age and need more drugstore goods, they also seek convenience over price.

Personally I really like the company, and I like the industry fundamentals and outlook even better.

Here is a glimpse at Shoppers Drug Mart's Recent dividend record:
2005 = $0.40
2006 = $0.48
2007 = $0.64
2008 = $0.86 (projected)

This is swift dividend growth indeed, as Shoppers has more than doubled its dividend in three years.