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<< Read More: Compare Discount Store Stocks - Part II

How can you pick the right stock in an industry you like for your portfolio? Here, we demonstrate a stock comparison process as we compare discount store stocks.

Comparing stocks

To compare discount store stocks, we look at both narrative and numbers. The narrative includes a company’s strengths, how it makes money, all the talk that gets you enthusiastic about it. The numbers are metrics, and their trends, that show a company’s performance and ability to consistently generate growth.

We’ll be comparing the stocks of these discount stores:

1. Dollarama (DOL.TO)
2. Target (TGT)
3. Costco (COST)
4. Walmart (WMT)

For each one, we will:

1. Learn its business model
2. Analyze its dividend triangle
3. Identify its growth vectors
4. Understand the potential risks it faces
5. Review dividend safety and expected dividend growth
6. Analyze valuation

1- Business model

First, learn about the business model of each company. Learn enough to explain the business model using words a twelve-year-old would understand. Identify the similarities and differences between each company’s model. This will help you understandof how each will react or be affected by economic events.

Already, we see that we can classify the companies in different categories:

Dollar stores: DOL focuses on offering low-cost items.

General retailer: TGT and WMT offer more variety of products and prices. Both have an e-commerce platform and use their stores as distributor warehouses. TGT is focused on the U.S. while WMT is world-wide . WMT is more diversified; it has a business segment in the third category…

Membership warehouse retailer: COST customers pay a yearly membership fee to access its warehouse-style stores. There’s a limited number of products; customers buy in bulk and get a good deal. Its online and international presence are limited, both under-developed compared to WMT. WMT operates a similar concept with “Sam’s Club”.

Perhaps you could already eliminate stocks based on their business model, according to what you’re looking for. Dollar stores or warehouses? Home-based or international exposure? Quality or quantity?

2- Dividend triangle

Using the dividend triangle to compare stocks comes early in the comparison process. The dividend triangle not only shows you a great overview on each company’s metrics (revenue, EPS, and dividends) , but also the trend for each one over 10 years.

Dividend triangle metrics

These companies operate in a similar environment so their growth metrics could also be similar. If that’s not the case, you have to dig a little further. Here’s a glimpse from the DSR stock comparison tool:

(Click on image to enlarge)

From the metrics alone, we see that TGT and WMT don’t show double-digit growth across all metrics as opposed to DOL and COST. While TGT’s metrics look okay, WMT’s dividend growth rate (1.85% 5yr CAGR) looks weak compared to the others. I’d be tempted to discard WMT since I focus on strong dividend growers, but this analysis depends on what YOUR focus is.

Metrics trends

The dividend triangle metrics is only the first look at financial metrics. The next step is to look at each company’s dividend triangle to see the trend in these metrics.

Trend of dividend triangle metrics for Dollarama (Left) and Target (Right)

DOL shows a nearly perfect dividend triangle where all metrics follow the same trend. It tells usthe company uses the same playbook year after year to generate consistent results. Revenue and EPS growing in a similar manner tells us DOL.TO maintains its margins over time.

TGT’s dividend triangle isn’t that strong. Revenue and EPS surged after the pandemic but revenue reached a plateau while TGT has a hard time maintaining its margins, perhaps because it’s selling inventory at cheaper prices. It’s a good example of why looking at the trend is more important than the numbers alone. Notice how the dividend jumped after the Covid peak and resumed at a lower rate afterward. The trend tells you that despite TGT showing a 5yr CAGR of 11.59%, realistically, you can only expect a low single-digit increase in the future.

Trend of dividend triangle metrics for Costco (Left) and Walmart (Right)

Costco’s dividend triangle is perfect. All metrics go up in sync. The dividend trend is less obvious due to special dividends. Again, we see a company that maintains its margins and grows its sales consistently. As for WMT, its dividend triangle is similar to TGT; revenue increases constantly, but EPS struggles to keep up with the revenue trends. However, the latest dividend increase is way more generous than the trend.

So far, DOL and COST look like the big winners. They show a nearly perfect dividend triangle while TGT and WMT struggle to maintain constant growth in earnings and dividends. But we’re not done with our comparison yet.

Learn more about picking great stocks to create retirement income. Download our Dividend Income for Life guide.

3- Growth vectors

We invest for the future, not the past. Therefore, we must find out if these companies are likely to do perform well for the next five years. How will they continue growing revenues, EPS, and dividend payments? Are they in an expanding or saturated market? Are they diversifying their business or expanding geographically? After reading the DSR investment thesis for each of our four stocks, here is a summary:

Now that you know about their business models, their dividend triangle metrics and trends, and their growth possibilities, you’re probably excited about these candidates. However, the comparison process if not yet completed, so we can’t reach a conclusion yet. We’ll do that next week…

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