The Empire Company (EMP.A) is not widely known outside of Canada. The company owns and operates 1,500 grocery, gas, and drug stores across Canada. The company recently purchased Safeway's Canada assets, and operates under the following brands (among others): Sobey's, Thrifty Foods, Lawton's Drugs, Safeway, & Fast Fuel.
Source: CIBC World Markets Conference
The company has a long history of rewarding shareholders. Empire Company has not reduced its dividend for 30 consecutive years. Over the last decade, the company has increased dividends at an 11.3% CAGR.
Source: 2013 Annual Report
Empire increased sales 2.7% net of the Safeway acquisition for the company's 3rd quarter of 2014. Including the Safeway acquisition, sales increased over 40%. The acquisition of Safeway's Canadian assets is a major move for Empire. To put the deal into perspective, Empire acquired Safeway Canada for $5.8 billion. The market cap of Empire is currently $8.67 billion. Empire's debt load has increased nearly $3 billion due to the acquisition of Safeway Canada.
Source: Q3 2014 Report
The acquisition will be accretive for shareholders by giving Empire a significantly larger share of the grocery market in Canada. Cash flows from Safeway stores can be reinvested into other opportunities. Management has proven to be efficient at allocating capital, as shown by the company's impressive long-term growth.
In late 2013, Empire sold its movie theater assets for $248 million to Cineplex Inc. This move raised capital and better focused the company on its core business of grocery and food stores and related real estate.
Source: Q3 2014 Report
Empire recently announced it will be divesting 22 stores due to the Safeway Canada acquisition. The company is selling these stores to Overwaitea Food Group & Federated Co-Operatives for approximately $430 million. The proceeds of the deal will go to paying down debt from the original purchase of Safeway Canada.
Source: Empire 3rd Quarter Press Release
Empire's future growth will come from further acquisitions of grocery, food, drug, and gas related properties as well as organic growth of the company's Sotheby's brand. Empire is focusing on healthy food choices to appeal t more affluent customers. The company's ongoing success depends on the strength of the Sotheby's brand and management's ability to make sound investments.
Shareholders of Empire can expect a CAGR of 5.50% to 10.50% going forward from dividends (1.50%), share repurchases and organic growth (4% to 9%). The company has managed to compound sales and earnings at 5.2% and 8.7% per year over the last decade.
Empire appears to be fairly valued based on its P/E ratio compared to its peers.
The company's P/E ratio of 19 is very close to the S&P 500's P/E ratio of 19.30. Empire Company is fairly valued as compared to current market levels.
Consecutive Years of Dividend Increases
Empire has paid dividends for 30 consecutive years without a decrease. The company has managed to compound dividends at a 10%+ growth rate over the last decade. Businesses with a long history of increasing dividend payments are more likely to continue paying increasing dividends.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2
Empire has a current dividend yield of 1.53%, ranking it 98 out of 118 businesses with 25+ years of dividend payments without a reduction. The company's low yield is due to its conservative payout policy.
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns
Empire has a payout ratio of under 21%, ranking it at 4 out of 118 businesses with 25+ years of dividend payments without a reduction. The company's low payout ratio gives it significant room to continue growing dividends faster than overall company growth.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Long-Term Growth Rate
The company has managed to grow revenue per share at 5.2% over the last decade. This growth rate ranks the company at 55 out of 118 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4
Empire has a long-term standard deviation of 22.43%, ranking it at 28 out of 118 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3
Empire Company's recent acquisition of Safeway Canada coupled with the company's real estate and grocery experience has set the table for a long run of growth. The company has historically rewarded shareholders with steadily rising dividends. Empire ranks at 16 out of 118 businesses with a long history of dividend increases based on the 8 Rules of Dividend Investing.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.