Alimentation Couche-Tard: A Dividend Growth Investment For The Long Term
Summary
- Alimentation Couche-Tard has grown from one lonely store in Quebec into an international gas station/convenience store giant with over 16,000 locations.
- The company's breakneck rate of expansion is strongly reliant upon debt, and the coming electric vehicle revolution could render the gas station model obsolete.
- Nonetheless, the company's M&A track record, dividend history, and EV charging station pilot projects suggest that it may be able to navigate the transition to electric vehicles while growing its payout.
The retail industry is in the midst of a sea change. As e-commerce becomes a more and more predominant channel of retail trade, so-called "brick-and-mortar" retailers are falling out of favor. While many of these outlets are likely to die out as Amazon (AMZN) and its ilk take more and more market share away from them, mostly on the basis of superior price and ease of ordering, one traditional retail segment may survive - the convenience stores.
These stores allow customers to pick up items at literally "a moment's notice," even if not necessarily at the lowest available price. This is a value proposition that e-commerce sites cannot match. As a result, I believe that convenience stores have a robust future ahead of them.
One group of convenience stores, which may be a good consideration for future investment, is Alimentation Couche-Tard (OTCPK:ANCUF). This company, whose operations in the US are generally conducted under the "Circle K" brand, got its start in 1980 with a single store in the Canadian province of Quebec. Over the years, Couche-Tard has grown via organic growth and acquisitions into an international behemoth with over 16,000 stores in 25 countries and regions.
The company's locations typically comprise a fueling station combined with an attached convenience store. Sometimes, the company will own and operate the entire facility. Other times, Couche-Tard leaves the operation of either the retail or fuel portions of these locations to another partner. Couche-Tard also licenses its name out entirely to locations that are independently owned.
A look at Couche-Tard's international network illustrates the vast reach of its operations. The company has significant operations in the US, Canada, and Europe. The rest of its worldwide retail footprint typically consists of independent operations operating under a license agreement with Couche-Tard.
Couche-Tard has shown extreme willingness to grow its operations via mergers and acquisitions. Its most recent iteration of this tendency was its $4.4 billion purchase of CST Brands, Inc., an operator of some 1,300 gas station/convenience stores.
Source: Couche-Tard July 2018 Investor Presentation
However, despite its meteoric growth, Couche-Tard remains willing to experiment with cutting-edge technology in order to remain a relevant player in the 21st-century retail landscape. Perhaps the most significant example of this is the company's partnership with IONITY in the development of electric vehicle charging stations in Norway.
Given the fact that most of Couche-Tard's revenues are tied to the success of traditional gas stations in one way or another, the onset of electric vehicles could be an existential threat to the company if it obviates the need for traditional gas stations. As such, Couche-Tard's IONITY project is especially valuable because it represents a possible path forward in a post-gasoline world. Norway has one of the highest per-capita rates of electric vehicle ownership in the world, and as such, it is a valuable test market for Couche-Tard.
Over the next few years, the company aims to develop a network of 400 high-speed charging stations. If successful, this project could represent a way forward for Couche-Tard as the electrification of the world vehicle fleet at the expense of gasoline continues over the next several decades.
Couche-Tard's operational performance in the here and now is steady, if not as strong as it was a few years ago. While the company continues to expand, and its same-store sales growth remains positive among most reporting segments, the rate of growth for some of its segments - particularly the US merchandise segment - have dropped over the last few quarters. Perhaps this is the reason for the relative stagnation of the company's stock price over the last couple of years, relative to the torrid rate of price appreciation enjoyed by the company from the 2010-2016 period.
ANCUF data by YCharts
Dividends
Couche-Tard 's dividend record is excellent, as the chart below illustrates. While the company has not necessarily raised its dividend each and every year, the company managed to hold its dividend steady over the course of the Great Recession. It also recently hiked its dividend by 11.1%. Coming after a torrid spate of dividend hikes, which started in late 2013, Couche-Tard's dividend payout has quadrupled since 2012
ATD.B Dividend data by YCharts
Unfortunately, like many companies, which post a high rate of dividend growth, Couche-Tard offers a microscopic dividend yield to investors who get in at current prices. Currently, investors can expect to receive around 0.6% on their investment in Alimentation Couche-Tard. Despite the fact that this yield is less than half that of the broader US and Canadian stock markets, this figure actually represents a relatively high yield in comparison to prior years.
ATD.B Dividend Yield (TTM) data by YCharts
Furthermore, Couche-Tard's dividend payout constitutes only a small portion of its earnings, as the chart shows below. The company's dividend "obligations" (remember, dividend payments are entirely optional) consumes only 6% of its EBITDA. As the company eventually runs out of suitable acquisition targets, brings its leverage ratio back in line with historical norms, and realizes more synergies and economies of scale from its acquisitions, I believe that shareholders will be rewarded with more and more dividend hikes.
Source: Couche-Tard July 2018 Investor Presentation
Debt
One of the primary risks associated with an investment in Couche-Tard is the company's heavy reliance on debt-fueled acquisitions as a means to achieve growth. Recent acquisitions have caused the company's leverage ratio to rise by over 50% from 2.0 in fiscal year 2017 to 3.1 in fiscal 2018. While the company maintains an investment-grade BBB S&P credit rating, it is important to note that the company's interest expenses have steadily grown.
Taken against the somewhat subdued same-store-sales growth of certain Couche-Tard product categories, this could bode ill for the company, should growth expectations fail to materialize while rising global interest rates cause the company's debt service costs to balloon out of control.
Set against this dire scenario is Couche-Tard's record of managing its debt levels over the long term. As the figure below illustrates, the company has been able to deleverage after other acquisitions. As such, it may be wise to give Couche-Tard the benefit of the doubt when contemplating its future debt servicing ability.
Source: Couche-Tard July 2018 Investor Presentation
Risks
Aside from the debt levels just alluded to, there are other risks, which prospective investors in Alimentation Couche-Tard should take into consideration. First and foremost, the coming adoption of electric vehicles on the road has the potential to pose an existential threat to the sustainability of fueling stations all over the developed world. Fortunately, players in the industry are taking steps to adapt to the new paradigm. One interesting fact is that many European drivers live in flats with no parking space in which they can "charge up" their electric vehicle each night, thus necessitating a visit to a local charging station.
Couche-Tard's joint venture with IONITY is perfectly positioned to profit from this state of affairs, and should the increasing urbanization of the US result in a similar situation in North America, Couche-Tard should be able to navigate the EV revolution just fine.
Investors should also consider the risks posed by the enormous - $6.1 billion - amount of goodwill, which the company is carrying on its balance sheet. If Couche-Tard's acquisitions fail to generate the expected synergies after the fact, it is possible that the company will have to record an impairment on this goodwill. This could result in a write-down that has the potential to have a negative effect on the stock price.
Closing Thoughts
Alimentation Couche-Tard is a "bricks-and-mortar" retailer, which I believe will weather the threat posed to the sector by the spread of e-commerce. The company's involvement in joint ventures, which seek to serve the needs of electric vehicle owners also suggests that its fueling stations will be able to, in the whole, transition into a future characterized by an electrified vehicle fleet.
While investors should monitor the company's debt levels, Couche-Tard's history of successfully deleveraging in the wake of previous acquisitions lend confidence to the notion that this company - one of the largest traded on Canadian markets - will be able to continue its operational and dividend growth.
Disclaimer: Use my work as a starting point for your own due diligence, not as a substitute. All investments involve the risk of loss of income as well as the principal. Consider consulting with an investment adviser before making any investment. I am not a tax professional or investment advisor. Please consider consulting with a tax professional before making any investment. Author-generated charts are subject to error due to discrepancies in source data or securities being listed on multiple international markets.
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