Dollarama's Strategic Share Repurchases: A Winning Capital Allocation Play?

Dollarama Inc. (TSX: DOL) has long been a stalwart of Canadian retail, leveraging its discount model to weather economic cycles and deliver consistent returns. The company's recent renewal of its normal course issuer bid (NCIB) highlights a strategic focus on capital allocation—one that combines aggressive share repurchases with dividend growth. But does this approach maximize shareholder value, or does it risk overextending the business? Let's dissect the numbers.

The Renewed NCIB: Scale and Context

On July 3, 2025, Dollarama announced its latest NCIB renewal, allowing it to repurchase up to 13.87 million shares (5.0% of its public float) over the next 12 months. This follows a prior NCIB (July 2024–July 2025) that authorized up to 16.55 million shares, of which 8.12 million were repurchased by February 2025 at a weighted average price of $131.55. The renewed bid underscores management's confidence in the stock's undervaluation and their ability to deploy excess cash efficiently.

Dollarama's stock price performance vs. the S&P/TSX Composite Index since July 2023
This chart will help assess whether repurchases have historically boosted shareholder returns or merely coincided with market fluctuations.

Share Repurchase Efficiency: A Mixed Bag

While Dollarama's NCIBs aim to reduce dilution and boost per-share metrics, execution matters. During the previous NCIB period, the company utilized only 49% of its authorized buyback capacity. This suggests either market conditions (e.g., rising stock prices) limited purchases or deliberate restraint. The $1.07 billion spent on repurchases in fiscal 2025 reflects a material allocation of capital, but at an average price of $131.55, the stock's valuation at the time of purchase must be scrutinized.

If the stock was undervalued, this was a shrewd move. However, if the buybacks occurred near peaks, they could dilute future returns. Investors should analyze Dollarama's price-to-earnings (P/E) ratio during the repurchase period to gauge timing effectiveness.

Capital Allocation: Dividends vs. Buybacks

Dollarama's capital allocation strategy is a blend of share repurchases and dividend growth. In April 2025, the company increased its quarterly dividend by 15% to $0.1058 per share, marking its 18th consecutive annual dividend hike. This dual approach aims to satisfy both income-seeking and growth-oriented investors.

However, balancing these uses requires discipline. With net debt at a manageable $1.2 billion (as of Q4 2024) and free cash flow of ~$1.3 billion annually, Dollarama has the financial flexibility to sustain both initiatives. Yet, investors must ensure that repurchases aren't crowding out growth investments, such as store expansions or logistics upgrades.

Dollarama's free cash flow (FCF) and dividend payout ratio over the past five years
This data will reveal whether dividends and buybacks are being funded sustainably or at the expense of long-term growth.

Strategic Priorities: Growth vs. Returns

Dollarama's fiscal 2026 outlook includes 70–80 new store openings and a $185–$210 million capital expenditure budget, excluding its Calgary logistics hub. Meanwhile, international expansion via its 60.1% stake in Dollarcity (targeting Mexico by mid-2025) and the proposed acquisition of Australia's The Reject Shop add complexity.

The question is: Can Dollarama simultaneously fund growth initiatives, return capital to shareholders, and maintain its fortress balance sheet? Management's emphasis on “financial discipline” suggests they believe so, but execution remains key.

Risks and Considerations

• Economic Sensitivity: While discount retailers thrive in recessions, Dollarama's Canadian market dominance (over 2,300 stores) limits domestic growth. A prolonged economic downturn could strain margins.
• Valuation: At a P/E of ~28x (based on 2024 earnings), Dollarama trades at a premium to peers. Buybacks at these levels may offer diminishing returns.
• Debt Management: While current leverage is low, aggressive buybacks paired with dividend hikes could limit flexibility if cash flows falter.

Investment Thesis

Dollarama's NCIB renewal and dividend growth reflect a shareholder-friendly ethos, but investors must weigh execution risks. The company's fortress balance sheet and recession-resistant model provide a solid foundation, but valuations and capital allocation priorities matter.

Recommendation:
- Buy: For long-term investors who believe in Dollarama's dominance in the Canadian discount market and its ability to execute international expansion.
- Hold: For those awaiting a pullback in valuation or clearer signals on buyback timing.
- Avoid: If economic headwinds or margin pressures emerge, or if buybacks are conducted at inflated prices.

Dollarama's debt-to-equity ratio and dividend yield compared to Canadian retail peers (Walmart, Loblaws, etc.)
This comparison will help assess whether Dollarama's capital allocation is more or less aggressive than competitors.

Conclusion

Dollarama's renewed NCIB is a bold statement of confidence, but its success hinges on execution. The company's track record of disciplined capital allocation and dividend growth gives reason for optimism. However, investors must monitor valuation, leverage, and the pace of buybacks relative to store growth. For now, Dollarama remains a compelling play in a sector where few companies can claim its resilience and scale.

Final Note: Always consider personal financial goals and consult a professional before making investment decisions.