9 Canadian Stock Cannibals That Look Attractively Valued Today

Your author is a big fan of share buybacks. Under a few select conditions, of course.

Firstly, it has to be an actual share buyback, not something that just offsets stock option dilution. There are easily dozens of companies in Canada that participate in this treachery, boasting to investors about their big share buyback programs while the overall share count barely moves. They can get away with this because most investors don’t bother to read the fine print.

Remember how I said the fine print doesn’t matter? That’s one exception. You always want to keep an eye on dilution.

There are a couple more caveats, too. I prefer to look at stocks that have experienced steady growth and look likely to continue that growth in the future. There’s potentially money to be made investing in slowly shrinking companies that use excess cash flow to repurchase shares, but I (usually) don’t choose to fish in those waters. I also look for companies that do buybacks and pay dividends, two numbers I combine into a metric I like to call shareholder yield.

Editor’s note: everyone else calls it shareholder yield too.

Editor’s editor’s note: These are all just Nelson. He likes to throw these in to try and show everyone this isn’t some two-bit operation here.

Some investors prefer steady share buybacks, preferring a company to steadily dollar-cost average into its own share count. I can see the benefits of taking a more lumpy approach, hoovering up shares when they’re at an attractive valuation or when the market has just taken a dive. As long as the share count is going in the right direction, I’m good.

Let’s take a closer look at a small subset of companies I think are attractively valued today, share cannibals that have consistently repurchased shares for a while now.

Dream Office REIT

The entire world is still debating whether we’ll all go back to the office in 2022. Top management teams are eager to get everyone together under one roof again while employees are happy to continue working in their underpants at home.

And through it all, Dream Office REIT (TSX:D.UN) continues to gobble up shares.

Dream is an opportunistic share repurchaser. Management seems to steer the company into temporarily tough situations — remember its big expansion into Calgary office space — and then repurchase shares when they’re cheap. The company did a massive share buyback in 2017 after selling much of the Calgary portfolio.

The buybacks have continued, and you can see the result. More than 50% of shares have been eliminated over the last five years.

All these charts will be from the excellent Tikr.com, a $15 per month (USD) stock information service that’s worth every penny.

At the $27 range, I’m not entirely sure Dream has a lot of short-term upside left. It seems like the market is pricing in people going back to the office in the spring. But it’s still an excellent company to hold over the longer term.

Dollarama

I wrote about Dollarama (TSX:DOL) as one of the first posts on this here Substack, calling it the best retail stock in Canada. It’s up 15% since then — in about nine months — and I think it’s pretty much a slam dunk to continue to grow at a 10-15% annual clip for the next decade or two.

I struggle a little bit with the company’s lackluster dividend yield, but once you add in the buybacks the total shareholder yield becomes much more acceptable.

The company has just slowly cannibalized its own shares for years now, and I’m on board.

The founding family has been selling off shares for years now, but still own more than 4% of the retailer.

Magna 

Magna International (TSX:MG) shares have gotten crushed lately as markets have officially been spooked by the company’s Russia exposure. Global supply chain issues haven’t been kind to the maker of auto parts either.

These are short-term issues. Over the long-term, Magna has consistently grown its business, remained profitable in a business where that’s not always easy, gushed free cash flow, and steadily increased its dividend while cannibalizing its own shares. I’m not usually a fan of the auto parts industry, but Magna is so friendly to its shareholders I made an exception and bought a few shares for my TFSA.

Artis REIT

Artis REIT (TSX:AX.UN) has quietly transformed itself over the last couple years. Activist shareholders got involved and ousted the previous management team, whose only real accomplishment was building a diverse set of assets. New management is focusing on punting the assets they don’t want and giving back the proceeds to shareholders through an impressive buyback plan.

23 million shares in three years — or about 15% of the total outstanding — is nothing to sneeze at.

BRP

Bombardier Recreational Products — better known as BRP (TSX:DOO) — was the only good thing to come from the Bombardier group of businesses. BRP shareholders have done just fine since the assets were spun out of the parent.

It was also an interesting opportunity I wrote about as one of the first posts of this Substack, giving it exclusively to the 14 or so email subscribers I had at that time. The short-term opportunity didn’t work out, but people who followed the idea had plenty of time to sell out at a nice profit before general market weakness took the stock lower.

This is probably a good time to remind those of you who haven’t signed up for email updates to do so:

At $83 per share, DOO is the cheapest it’s been for months. It also trades for about 8x trailing earnings, has a solid balance sheet, and what looks like plenty of long-term growth potential. It has also done this to its share count over the last five years:

That’s more than 20% of the company repurchased in the last five years.

Suncor

A certain now defunct share buyback ETF had Canadian Natural Resources (TSX:CNQ) as a top holding, despite the company’s dirty little secret of just buying back enough shares to offset exec compensation. If you’re looking for buybacks in the energy sector, the place to go is Suncor (TSX:SU).

A few years ago Suncor finally saw the light and started giving back to shareholders in a big way. It even cut the dividend — and interrupted its much-loved dividend growth streak — to focus on buybacks. Now that oil is going parabolic, I don’t think investors have to worry much about dividends for at least a little while.

Suncor has eliminated about 10% of total shares outstanding over the last three years. If they keep this up for another few years they could make a big dent.

Imperial Oil

It’s mostly the same story for Imperial Oil (TSX:IMO), except it hasn’t broken its dividend growth streak and has a much more cleaner balance sheet.

That’s close to a 20% reduction in shares outstanding over the last five years.

Gildan Activeware

Gildan (TSX:GIL) is a funny company. About once a year it seems to miss earnings expectations badly and the stock absolutely tanks on the news. We’re talking 10-15% declines on something that should be a 2-4% dip. I think about buying the stock, begin to do a little work, and two days later it’s made up most of the ground it just lost.

The maker of t-shirts (including the one I’m wearing right now), socks, and underpants is a consistent share repurchaser, eliminating close to 20% of shares outstanding since the start of 2017. Combine that with its 1.9% dividend and Gildan offers a pretty solid total shareholder yield.

Cogeco

Despite posting solid returns and not generally pissing people off — which is rare for a cable company — Cogeco (TSX:CGO) and (TSX:CCA) really flies under the radar.

One big reason is likely the two stocks trading on the TSX, something that held back the Power group of companies for years. That hung around for a couple decades at least before management wisely smartened up and got rid of the weird situation discount.

In the meantime, both the issues of shares have repurchased shares over the last few years, but the smaller of the two — which is CGO — has been the more consistent cannibal. Close to a million shares is pretty good when you only have 16M outstanding.

Let’s wrap this up

The interesting thing about this exercise is it was difficult to find nine companies who have consistently repurchased shares over the medium term (3-5 years), never mind the long-term (5 years+). Canada just doesn’t have that many.

Which makes these companies all the more precious. Some may pivot away from the strategy — Dream and Artis are my two leading candidates for that — but at least this list is a start.

Please add any I’ve missed to the comments, or reply to this email and I’ll update above.