A three-day hiking trip along the coast during my student years still brings back vivid memories. Two of them stand out: the stunning scenery on the West Coast of South Africa and the Coke that we managed to buy from the only grocery store in the remote town of Paternoster.

Apart from the enjoyment of a cold drink, I also remember the Coke cost almost double what it would cost in grocery stores in the city. Nevertheless, we wanted it, and the only supplier around was not going to part with it cheaply—even for students.

The profit margins achieved by North West Company (TSE: NWC) often remind me of the profitability of that Paternoster store. North West is mainly a retailer of food (80% of revenue), but also of general merchandise to underserviced rural communities and urban neighborhoods in Canada, Alaska, the South Pacific and the Caribbean.

The company is a great investment because it consistently delivers higher profit margins and higher returns on equity than its Canadian peers, including Loblaw, Empire and Metro. It also beats the large U.S. retailers Walmart and Costco on these measures. And it yields 4.5%.

Catering to smaller, hard-to-access markets better than the larger retailers is key to its success. The graph illustrates North West’s operating margin and return on equity compared with its Canadian peers as well as the two U.S. giants.

The company traces its roots back to the 18th century, with some northern Canadian and Alaskan stores in operation for more than 200 years. These northern stores serve smaller communities with populations from 300 to 9,000. A typical store measures around 7,500 square feet and sells food, family apparel, housewares, appliances, outdoor products and services such as mail, money transfers and check cashing.

In 2007, North West acquired Cost-U-Less, a chain of midsize warehouse stores in the South Pacific islands and the Caribbean. Today, North West runs 224 stores under trading names including Northern, NorthMart, Giant Tiger, AC Value Center and Cost-U-Less, and has annual sales of about $1.6 billion.

On the Right Track

Over the past few years, North West struggled to grow the business with both revenues and profit stagnating. However, the latest results indicate that management’s strategies are starting to boost the company.

The gist of these is an intense focus on North West’s top 40 markets with updated and reconfigured stores, and emphasis on high-potential products and services. This is a work in progress and will continue over the next three years with an annual capital expenditure requirement of $65 million. This year the company expects to complete 10 to 12 renovations, scheduling most reopenings for the third quarter.

The latest quarterly results were promising: Profits increased 23% on a revenue increase of 10%, with good same-store sales growth in Canada and the international division (Alaska and Caribbean). With solid cost controls, the operating margin was at its best first-quarter level since 2007. Although the weaker Canadian dollar helped the results, management remained optimistic about the outlook for the Alaska and Caribbean operations but was more cautious about the Canadian operation, where growth is expected to be generated mainly through market-share gains driven by the top market and top categories strategies.

Consensus forecasts see earnings per share of 17% for 2015 with another 7% growth in 2016 and 8% in 2017. Somewhat surprisingly, the dividend per share was left unchanged for the first quarter. Perhaps, the board is mindful of the money needed to renovate more stores, but with sound cash flow it has no rea son not to increase the dividend in line with the growth in profits over the next three years.

Cash Machine

The company has built an enviable track record of profit and dividend growth over a long period. Dividends (tax-adjusted for the conversion of a trust to a company in 2010) grew more than 10% annually over the past 10 years, well ahead of the rate of inflation.

The balance sheet of the company is solid, with a net debt-to-capital ratio of 39%, and interest payments are covered more than 19 times by the profit from operations.

The operating cash flow of the business is excellent, with 7% of revenue ending up as operating cash, which is particularly good for a retailer. Free cash flow (that is operating cash flow minus capital expenditures) covers the dividend payments adequately most years.

Well Valued

Based on the conventional price/earnings and EV/EBITDA valuation measures applied to retail companies, North West is valued in line with its main Canadian peers. However, thanks to the superior level of its profitability, a premium valuation would be in order.

Given the strength of the franchise, the juicy 4.2% dividend, the long track record of above-average profitability and dividend payments, the solid balance sheet, sound cash flows and reasonable business prospects, income investors should consider the stock. Buy below $28.