An income trust that stands tall in small markets
Food companies are still wise investments in a volatile market, says this Canadian advisory, and one remote income trust gets its vote.
It was a fur trading company — you can see the voyageurs paddling heartily away on the company logo.
But the fur trading stopped in 1821, when this outfit merged with Hudson Bay Company. Now it’s a grocery store.
Before this turns into a Jeopardy question, we’ll reveal the name of the company. And why we’re writing about it.
It’s the North West Company Income Fund (TSX-NWF.UN). It runs a chain of grocery stores across northern Canada and in many rural areas around the country.
It has also started buying stores in other away-from-the-bright-lights locations, like remote islands in the Caribbean and the South Pacific.
And one of Canada’s oldest investment advisories (although not as old as the heyday of the voyageurs) thinks it’s a good buy.
The Investment Reporter has recently added it to a list of food stocks that it follows closely. At a time when so-called “defensive” consumer staples are still recommended for most investors, we’ll examine this income trust a little more closely.
Still very prudent
Yes, the markets have been rallying away merrily, but only the most speculative investors aren’t worrying about a possible trap door ahead.
The economy is still very slow. The credit markets are still very tight. Companies that deal in the necessities are still very prudent investments.
This advisory, in fact, has five food stocks listed as buys. And they aren’t expected to stop being buys when the recovery comes, either. The other four, in alphabetical order, are Canada Bread (TSX-CBY), Empire Co. (TSX-EMP.A), owner of Sobey’s; Metro Inc. (TSX-MRU.A) and dairy producer Saputo Inc.>/b> (TSX-SAP).
But we’re here to grab our paddles, head north and see how North West Company makes its money by remaining, as the advisory puts it, “a big fish in small ponds.”
Out of the glare
While the likes of Metro, Loblaw and Sobey’s compete for big dollars in big markets, North West Company goes its own way. Headquartered in Winnipeg, it sells groceries and general merchandise in more isolated parts of Canada.
That doesn’t mean that if you live in more southerly parts of the country, you’re completely isolated from the company (it owns Giant Tiger, for instance). But it definitely makes its money out of the glare of the spotlights.
And it is repeating that strategy overseas. About a year and a half ago, it bought Cost-U-Less, which operates big warehouse stores on out-of-the-way island communities in the South Pacific and Caribbean.
Then, a little over a year ago, it crossed the border to buy Span Alaska, a grocery and general merchandise business in the 49th state.
These foreign ventures now account for 35 per cent of North West’s total sales, which amount to almost $2 billion.
Let’s examine the key numbers. There are some interesting stories behind them.
A legal resolution
The many problems of the Indian Residential Schools are well documented. No need to re-hash them here. But the legal resolution of the issue brought a good deal of money to the North West Company.
The Indian Residential School Settlement Act of 2006 set up a “Permanent Dividend Fund” that put cash into the hands of many North West Company customers. Sales of general merchandise soared through 2007, racking up strong figures for fiscal 2008 (ended January 31, 2008).
But those sales, which account for roughly 22 per cent of all sales, couldn’t keep up this past year with less money available. They were still up 10 per cent in fiscal 2009, but same-store sales fell by 6 per cent.
Food sales more than filled the gap. They were up 35 per cent last year. And since they make up three quarters of all sales, they helped push earnings up 19 per cent from the year before.
Cash flow rose 12 per cent and more than covered net capital investment. But cash distributions of $67.7 million did put a strain on the trust’s total cash flow.
Shopping for cash
The distribution may be North West Company’s most attractive feature. At $1.28 a unit, it yields 7.9 per cent. “In fact, special distributions in each of the last three years raised the yield further,” says this advisory.
For fiscal 2010, North West Company expects more of the same — strong food sales but flat earnings from general merchandise. On the other hand, it gets the benefit of a full year of sales from Span Alaska.
Not least, the company is investing efficiently. It is adding new stores, drugstores and gas stations. And it is investing in energy conservation in order to cut power bills and upgrading its information systems.
Buy North West Company Fund, says The Investment Reporter, because “its growth will let it pay you generous income while you wait for long-term gains.”
In other words, many Canadians may buy their food somewhere else, but they can still shop for cash at the North West Company.
|
E-mail this article
Printer-Friendly
