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Investment Ideas There are two ways dividend lovers can play Canadian Tire - and both are on sale right now

Rather than launch into a discussion of Canadian Tire’s earnings estimates, P/E multiple or sales (I’ll get to that stuff in a moment), I’m going to begin this column by listing all of the items I personally bought at the retailer – or one of its sister chains such as Mark’s or Sport Chek – in the past year.

Here goes: Five hockey sticks, one hockey helmet, multiple rolls of hockey tape, one set of windshield wiper blades, two parkas, one pair of binoculars, four furnace filters, one pair of swimming goggles, one inflatable air mattress, two fans and roughly six pairs of Nike or Adidas running shoes (my kids wear them out quickly).

You’d think, based on my purchases alone, that Canadian Tire Corp. Ltd.’s shares would be soaring. Nope. The opposite. After posting a scorching five-year annualized total return of more than 19 per cent through the end of 2017, the stock lost 11 per cent last year. (All returns cited here include dividends.)

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It’s been a similar trajectory for Canadian Tire’s property arm, CT Real Estate Investment Trust. Even during banner year for REITs in 2018, when the sector was one of the market’s few winners, CT REIT’s total return was negative 16 per cent.

So, has the Tire totally lost its tread? Is this the beginning of a long and nasty skid for the Canadian retailing icon?

Hardly. If anything, the recent pullback may offer a good buying opportunity. For dividend investors, in particular, Canadian Tire and CT REIT both look attractive: Even as their shares have been falling, both companies have continued to raise their dividends, giving their yields a boost.

In November, Canadian Tire extended its record of annual dividend hikes with a juicy 15.4-per-cent increase, to $4.15 a share on an annual basis. Based on Tuesday’s closing price of $148.15, the shares now yield 2.8 per cent. CT REIT also raised its distribution in November, marking its fifth increase since it was spun out from Canadian Tire in 2013. The 4-per-cent hike brought CT REIT’s annualized distribution to 75.72 cents – good for a yield of 6 per cent based CT REIT’s current unit price of $12.66. And I expect we’ll see plenty of dividend hikes in the years ahead.

Why, then, have both stocks struggled? In Canadian Tire’s case, some investors are worried about fourth-quarter results, which are scheduled for Feb. 14. Risks include a deceleration in holiday spending after Black Friday, economic weakness in Alberta and a lack of snow in the Greater Toronto Area (prior to this week’s major storm) that likely dented sales of seasonal items such as winter boots, snow shovels and windshield washer fluid, Desjardins Securities analyst Keith Howlett said in a recent note.

Citing the expected sales weakness, Mr. Howlett trimmed his fourth-quarter earnings estimate for Canadian Tire but still rates the stock a “buy," with a 12-month price target of $205. He said 2019 is shaping up as a pivotal year for the company and will demonstrate whether its roughly $1-billion acquisition of clothing brand Helly Hansen “will pay off financially … and whether the new Triangle loyalty and credit card programs have traction with consumers across all major retail banners (Canadian Tire, Mark’s, FGL Sports).”

Canadian Tire’s shares now trade at a price-to-earnings multiple of just 11.5, based on estimated earnings of $12.88 a share in 2019. But analysts are predicting that the Tire will reinflate: Of the 13 analysts who follow the company, there are nine buy recommendations, three holds and one sell, and the average 12-month price target is $188.42, according to Refinitiv.

In CT REIT’s case, the units have tumbled for different reasons. Even though CT REIT has a solid track record of growth from property developments, acquisitions and rent increases, some investors prefer REITs with a more diversified tenant base (Canadian Tire is by far its largest tenant) and a greater focus on urban areas. Those factors, combined with CT REIT’s relatively thin trading volumes at a time when markets have been volatile, have weighed on its valuation, Scotia Capital analyst Pammi Bir said in a note.

But CT REIT’s units are now too cheap to ignore, Mr. Bir said. He calculated that the REIT’s net asset value (NAV) – essentially the market value of its properties and other assets minus debt – is $15.10 per unit, which implies that the units are trading at a steep 16-per-cent discount to NAV. CT REIT also trades at a sharply lower multiple of cash flow – as measured by adjusted funds from operations – compared with other retail REITs, he said.

The cheap valuation belies CT REIT’s many strengths, he said. In addition to having a strong balance sheet and plenty of future growth thanks to its association with Canadian Tire, CT REIT now enjoys improved trading liquidity after a recent joint offering of units by both companies that increased CT REIT’s public float by more than 65 per cent. (Canadian Tire owns about 76.3 per cent of CT REIT, down from about 85.5 per cent before the offering.)

If, like me, you find that a chunk of your disposable income winds up in the till at Canadian Tire, investing in the beaten-up shares of the retailer or its real estate subsidiary is a good way to get some of that money back in the form of a growing dividend. Remember to do your own due diligence before investing in any security.

Disclosure: The author owns units of CT REIT personally and in his model Yield Hog Dividend Growth Portfolio.

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