Dollarama Inc. is all about bargains. And when it comes to the company's stock buyback program, it appears repurchasing shares now is no bargain.
The dollar-store program on Wednesday revealed a new buyback program, saying it had regulators' approval to repurchase as much as $157-million of stock over the coming year. The company's earnings have been so strong, it is throwing off a steady stream of cash and the board wanted to add the ability to buy back shares as part of a plan to return capital to shareholders.
But should it do so? The stock's climb has only accelerated in recent weeks, and it's now trading in record territory over $60 a share, well above the $57.73 target price that's the average of 13 analysts tracked by Bloomberg. Relative to similar retailers, its shares are also pricey.
At those valuations, Dollarama would be in danger of the "buy high, sell low" perils of stock buybacks. When companies are doing well and throwing off cash, their stock tends to be trading strongly, so buybacks are expensive.
"Given the high share price and valuation premium to comparables, we doubt that the NCIB will be actively used at this share price level," argues analyst Neil Linsdell of Versant Partners, who believes "that the share price has gotten ahead of the company's performance."
By his measure, Dollarama's enterprise value is 14.2 times consensus estimates for this year's earnings, above the range of nine times to 11 times where comparable companies trade.
On the company's conference call, executives were coy about how they would use excess cash. Dividend increases, last seen three months ago, are a possibility. So is further debt reduction.
The buyback is "an added instrument that gives us flexibility and an alternative to giving back value to the shareholder," said Michael Ross, the company's chief financial officer, and the company noted there's no obligation to do the whole buyback.
Should the company decide to do so, Barclay's analyst Jim Durran believes the buyback could add as much as 6 cents a share to Dollarama's earnings, estimated to be $2.72.