Dollarama Inc. (TSX:DOL) has been one of the true darlings of the Toronto Stock Exchange, increasing more than 960% since its 2009 IPO.
Growth has been outstanding and doesn’t look to be slowing down much. During its latest quarter, revenue grew to $729 million versus $653 million last year. And that was despite three fewer sales days. Net profit grew from $0.74 per share to $0.89.
The company is also aggressively buying back shares, decreasing the float from 129.5 million shares to 119.4 million. This kind of share buyback program is practically unheard of.
One issue for many investors is Dollarama’s anemic dividend. Even though the company has already raised its dividend by more than 10% in 2016 alone, the $0.10 per share quarterly dividend only works out to a 0.4% yield.
Investors who can look past the pitiful current yield see something much more interesting. Dollarama has huge dividend growth potential.
With an annual dividend of $0.40 per share and earnings of $3.34, Dollarama has a payout ratio of just over 10%, which is about as low as you’ll find. Much of its cash flow is currently dedicated to buying back shares, but that attitude could change. And when it does, it has huge potential to grow the payout.
If Dollarama increases its dividend to $1 per share--an increase of 150%--it will still only pay out 30% of trailing earnings. Remember, Dollarama is still growing earnings nicely. That 30% payout ratio will steadily head lower.
