Canadian Tire says no to executive bonuses, but yes to a big dividend

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You have to give Canadian Tire Corp. Ltd. CTC-T some credit when the retailer’s board this week decided to award no cash bonuses to its top executives for 2023. As a statement, this one is clear: There are no excuses for delivering disappointing financial performance.

The more important issue for investors, though, is whether the board’s tough approach to executive compensation will have any impact on Canadian Tire’s struggling share price.

The stock has slumped 28 per cent since July, reflecting the company’s declining fortunes. It is now trading at levels seen five years ago.

Last year, revenue fell 6.5 per cent. The fourth quarter was particularly rough, with revenue down 16.8 per cent from the same period in 2022.

Net profit shrank to $339.1-million in 2023, down from $1.18-billion in the previous year and missing targets.

“This past year was challenging, more so than we expected at the outset, given rising interest rates, stubborn inflation impacting discretionary spend and unfavourable weather,” said Greg Hicks, Canadian Tire’s chief executive officer, during a conference call with analysts in February.

That last bit – an allusion to the unusually warm winter, which robbed the retailer of its ability move snow-themed clothing and outdoor gear – may have hit Canadian Tire harder than many other retailers, given its rows of skates, boots and snow blowers.

For the most part, though, retailers have faced a difficult environment over the past year, as high inflation and rising borrowing costs have weighed on consumers.

According to The Conference Board, U.S. consumer confidence remains well below recent highs in 2021, when interest rates were near-zero.

The present situation part of the overall index, which is based on assessments of current business and labour market conditions, ticked higher last month. But the expectations part of the index, which is on the short-term outlook for income, business and labour market conditions, fell deeper into territory that signals a coming recession.

“Consumers’ assessment of the present situation improved in March, but they also became more pessimistic about the future,” said Dana Peterson, chief economist at The Conference Board, in a release.

Sure, many Wall Street economists may be taking a sunnier view of the economy in 2024, at least compared with far more dour assessments of the economy this time last year, when recession predictions were popular.

But the share prices of a number of retailers suggest that the outlook remains far from upbeat, as consumers turn to essentials and experiences such as travel.

Best Buy Co Inc. BBY-N shares are up just 2 per cent over the past year, trailing the tech-fuelled Standard & Poor’s 500 by 29 percentage points.

Nike Inc. NKE-N is down 27 per cent over this same period, and Dollar General Corp. DG-N is down 25 per cent. Lululemon Athletica Inc. has fallen 29 per cent this year alone.

In other words, Canadian Tire has plenty of company as it navigates cautious consumers. That may be comforting: It suggests that the retailer isn’t floundering with misguided direction or poor execution. Rather, it is facing a tough environment that may be largely reflected in the current share price.

According to February valuation numbers from Mark Petrie, an analyst at CIBC Capital Markets, Canadian Tire shares trade at 12.3 times his estimated earnings for 2024.

That’s higher than the average price-to-earnings ratio of 10.4 for peers in the sporting goods sector, according to Mr. Petrie’s numbers. But the valuation is lower than general merchandise and automotive peers, which have P/Es of 23.6 and 18.5, respectively.

What’s more, Canadian Tire shares have an unusually attractive dividend yield for a retailer. As the share price has retreated over the past year, the yield has risen to 5.2 per cent, offering investors an incentive for holding on.

Is the dividend safe? The company aims to distribute 30 to 40 per cent of its prior year’s “normalized net income,” which are profits related to Canadian Tire’s core business operations.

By that measure, the current payout ratio is about 68 per cent, which is well above target. Over the long term, that could be a risk, especially if the economy deteriorates.

Still, Canadian Tire looks like a decent bet on better days ahead for retail stocks. Interest rate cuts, which should come with subsiding inflationary pressures, will likely help. So, too, will rebounding consumer confidence as borrowing costs decline.

Top executives might have missed their bonuses this year. But at least they have delivered something far more important to investors: an attractive stock.