Dollarama’s Share Buyback Strategy: A Strategic Move or Overpayment Risk?

Dollarama Inc. (DOL.TO) has reignited its share repurchase program, authorizing the buyback of up to 5% of its outstanding shares under a renewed normal course issuer bid (NCIB) in July 2025. This move, framed as a “judicious use of available funds to enhance shareholder value,” raises critical questions about capital allocation efficiency and valuation justification [1]. With a trailing P/E ratio of 42.58 and a forward P/E of 39.05, the stock appears to trade at a premium to earnings, while its intrinsic value estimate of 91.18 CAD suggests a 51% overvaluation relative to its current price of 185.07 CAD [2]. This article examines whether the buyback aligns with Dollarama’s financial strength or risks rewarding shareholders at the expense of long-term growth.

Strategic Rationale and Financial Foundations

Dollarama’s 2025 NCIB reflects confidence in its robust free cash flow of $1.46 billion and a debt-to-equity ratio of 3.82, which, while elevated, is offset by a return on invested capital (ROIC) of 16.30%—well above its estimated weighted average cost of capital (WACC) of 4.27% to 6.53% [2]. The board’s rationale hinges on the premise that repurchasing undervalued shares at a discount to the volume-weighted average price is a superior use of capital compared to reinvestment in its core business or international expansion [1]. Analysts have largely endorsed this logic, with RBC Capital and Desjardins raising price targets to C$212 and C$205, respectively, citing “sector-leading growth” in Canada and Australia [2].

However, the buyback’s success hinges on execution. While Dollarama’s Q2 2025 results—$1.72 billion in revenue, 10.3% year-over-year growth, and a 34.1% EBITDA margin—underscore operational strength [3], the company’s high P/E ratio implies the market is pricing in aggressive future growth. If the buyback occurs at prices exceeding intrinsic value, it could erode shareholder returns. For instance, the intrinsic value estimate of 91.18 CAD starkly contrasts with the current price, suggesting that repurchasing shares at a 100% premium to intrinsic value would be a costly mistake [2].

Valuation Justification and Analyst Optimism

Analysts remain bullish, with an average price target of C$203.41 (5.37% above the current price) and a consensus “Buy” rating [2]. This optimism is partly fueled by Dollarama’s international expansion, including the acquisition of The Reject Shop in Australia, which added 395 stores to its footprint [3]. Yet, the valuation disconnect persists. A WACC of 4.27% implies that capital costs are low, making buybacks accretive if shares trade below their intrinsic value. However, with the stock priced at 185.07 CAD—nearly double the intrinsic estimate—this condition is not met [2].

Risks of Overpayment and Market Realism

The primary risk lies in overpayment. While Dollarama’s buyback program allows repurchases at a discount to the volume-weighted average price, the exact discount remains undisclosed. If the discount is insufficient to bridge the gap between market price and intrinsic value, the buyback could dilute returns. For example, repurchasing shares at 185.07 CAD when intrinsic value is 91.18 CAD would require spending $1.46 billion to buy back roughly 8 million shares—a move that would reduce equity value by 1.46 billion CAD but add only 730 million CAD in intrinsic value, netting a 730 million CAD loss [2].

Moreover, Dollarama’s debt load—3.82 times equity—introduces leverage risk. While the company’s free cash flow cushions this, a downturn in same-store sales growth (currently 4.9% in Q2 2025) or international expansion costs could strain liquidity [3]. Analysts’ price targets assume continued growth, but overreliance on buybacks may signal a lack of high-return reinvestment opportunities, which could deter long-term investors.

Conclusion: Balancing Strategy and Caution

Dollarama’s share buyback strategy is a double-edged sword. On one hand, its strong free cash flow, high ROIC, and low WACC justify returning capital to shareholders. On the other, the stock’s premium valuation and lack of a clear discount in repurchase terms raise overpayment risks. For the buyback to be accretive, management must ensure repurchases occur at prices closer to intrinsic value. Investors should monitor Dollarama’s ability to balance buybacks with disciplined international expansion and debt management.

Source:
[1] DOLLARAMA ANNOUNCES RENEWAL OF NORMAL COURSE ISSUER BID [https://www.prnewswire.com/news-releases/dollarama-announces-renewal-of-normal-course-issuer-bid-302497298.html]
[2] Dollarama (TSX:DOL) Statistics & Valuation Metrics [https://stockanalysis.com/quote/tsx/DOL/statistics/]
[3] Dollarama Q2-FY26 slides: Strong growth continues with ... [https://www.investing.com/news/company-news/dollarama-q2fy26-slides-strong-growth-continues-with-ambitious-international-expansion-93CH-4212562]