I have recently been spending ample time considering the age-related demographic shift which is taking place both globally and within my home market of Canada. People are living much longer than they did even fifty years ago. This change in the life expectancy of citizens has serious financial ramifications for anyone hoping to have a long and prosperous retirement (read: everyone).
My musings have led me to also consider which industries might be greatly impacted by this movement and how I might turn a profit as a result. Healthcare is an obvious field which feels the full effect of an aging populace. It is no longer uncommon to even see people reach their 90s.
This geriatric contingent tends to have increasingly complicated pharmaceutical needs. I know very few people past even 50 who are not taking some sort of pill to “improve” their life in some way. From blood pressure medication to multivitamins, people just do not seem to be able to get through their days without taking some medicine. It is all too reminiscent of Huxley’s Brave New World. With that said, I believe that if you can’t beat ‘em….
In November of 2014 I initiated a starter position in what I consider to be one of the finest pharmaceutical companies in the Canadian market. I detailed Jean Coutu PJC Inc. (PJC.A) and its operations in an article referenced on this site and which can be read in full detail on Seeking Alpha. Be aware that the Seeking Alpha article references the U.S. permutation of PJC.A and the figures are in USD as Seeking Alpha operates out of New York City.
As a result, I will refrain from going over what I have already written and rather detail why I decided to add to my position.
Table of Contents
Improved Valuation
This purchase boils down to two key factors:
- The story with the company is basically the same as when I bought initially back in November; we are talking about a first-rate operator which is firmly entrenched in its home markets and which has been intelligently expanding beyond those borders.
- The stock is down over 10% while the dividend is up 10%. This combination makes the shares more valuable to me as an investor.
When I purchased my shares at just over $27 in November, I felt I was paying “fair value” and not enjoying the sort of margin of safety that I really like to have with my stock investments. However, as cash had been accumulating in my account, I decided it was worth buying a quality company at a fair price. Charlie Munger has oft talked on this subject and I do agree it is hard to go wrong buying great companies at decent prices.
At the time of my initial acquisition, however I acknowledged that I would also like to add more to this stake over time as the price permitted. I was afforded this opportunity recently at the stock pulled back over 10% from my purchase price and in fact dipped nearly 2.5% on May 5 alone. This was enough for me to decide it was time to put some more of my cash to work.
I believe that averaging down with stocks is an important way to build wealth over the long term. It would be nonsensical for me to be willing to initiate a position at $27 and not feel even more comfortable doing so in the $23 range – before even factoring in the dividend bump which only makes this opportunity juicier.
Importance
At current prices, PJC.A offers a dividend yield of ~1.9%. Needless to say, this is not the sort of current yield which is going to immediately offer a significant boon to my dividend earnings. However, I feel it is important to balance a portfolio between high yield with low growth, mid yield with mid growth, and low yield with high growth. PJC.A currently falls into the latter category as I expect the company to deliver double digit dividend growth for years to come.
My 75 new shares of PJC.A will add $8.25 per quarter and $33 of annual income to my portfolio. The total cost was ~$1,770.
Conclusion
PJC.A is an excellent company which I have positive aspirations for. I expect the company to continue serving customers in all markets it competes and to expand its franchise into even more markets as time goes on. The company has a proven model which I believe can succeed anywhere in Canada so long as the company applies the same diligence going forward as it has in the past.
I would still like to add another 75 shares or so to my portfolio as prices permit. Subject to other opportunities, I would consider doing so in the $20 range.
– Ryan
Have you been buying healthcare stocks? What do you think of PJC.A?
Full Disclosure: Long PJC.A
Pictures courtesy of pixabay.com
Hi Ryan,
I’ve been following Jean-Coutu since nov 2013. It was my first dividend growth stock and in fact it was my first stock ever. I bet big at 18,49$ and bought 200 shares. The yield was low but since then I had a 17,6% raise in 2014 and a 10% raise in 2015. I think that in the 20-24$ range it is an attractive “stage 3” dividend growth stock. The initial yield is low but the dividend growth is strong. While I do agree with your analysis (the aging population popping more pills) I’m also a bit worried about government interactions here. They just passed a bill in Quebec to reduce the pharmacist wage and our public insurance will force dr to prescribe generic medications instead of the real names if a generic is available. I don’t know if all of this is going to impact profits but I know that provinces all throughout Canada all “playing” with laws such as that one to limit their expenses.
I’m fully allocated with Jean Coutu for now but at that price I would have considered adding to my position.
Cheers
Allan recently posted…Rich man quote : John D Rockefeller
Hi Allan,
Picking up PJC.A in the teens was a solid play, as I see it. $20 or so is my next entry price to average down some more. The low dividend yield always hurts initially, but the growth has been solid as you mention… making it indeed a solid Stage 3 div stock.
Your perspective on the Quebec law situation is definitely valuable. It’s always tough to know what that provincial government is going to do and how it might impact investments. One of the nice things about PJC.A is that it also owns a generic drug company called “Pro Doc” which supplies the Jean Coutu pharmacies. So, the company can still benefit from generic drug offerings.
Take care!
– Ryan
Yep but I think that in Ontario they forbid pharmacy to also own a drug company and thet were discussing the matter in quebec too. This could hurt jean coutu too.
Allan recently posted…Sold ARCP bought EMR!
Hmm, I wasn’t aware of such a law in Canada. I was under the impression PJC.A preferred all of its franchises to be pharmacist-owned. It would be a shame to see that changed… I believe stores benefit from pharmacist-franchisees. By having skin in the game, they are inclined to provide quality customer service. The conflicts of interest are obvious, however, though I don’t think it’s an issue that requires changing the regulatory framework.