We regularly review 10 food stocks on The Back Page section of our publication. They’re defensive companies that have held up better than the overall stock market. All 10 remain buys for long-term share price gains as well as high or rising dividends.
We regularly review 10 food stocks on The Back Page. They’re defensive. That’s partly because food is a necessity, of course. Consumers need to keep on buying food to replenish their refrigerators, cupboards and freezers. In addition, the big food retailers have generally done a good job of keeping up to date and serving new markets.
Loblaw is doing very well
Consider Toronto-based Key stock Loblaw Co. Ltd. (TSX—L). Since we published our March 18 issue, its share price has advanced by 12.6 per cent. That beats the average decline of 3.2 per cent for each of the 10 food stocks. The advance also gives Loblaw’s shares upwards price momentum. It remains a buy for further long-term share price gains as well as modest, but growing, dividends.
Loblaw operates 2,400 locations. It’s Canada’s largest supermarket chain and drugstore chain since it acquired Shoppers Drug Mart. It operates PC Financial services, Choice Properties REIT and Joe Fresh, among others.
In 2022, Loblaw’s earnings are expected to grow by 14.1 per cent, to $6.39 a share. Based on this estimate, the shares trade at a forward P/E (price-to-earnings) ratio of 18.7 times. In 2023, the company’s earnings are expected to grow by 10.3 per cent, to $7.94 a share. This works out to a better P/E ratio of less than 17 times.
Growing earnings feed rising dividends
Loblaw has used its growing earnings to raise its dividend. In fact, the company has increased its dividend for 11 years in a row. This makes Loblaw what’s known as a ‘dividend aristocrat’. In Canada, this term refers to companies that have raised their dividend for at least five consecutive years. Since Loblaw’s shares have climbed so much, however, it yields only a modest 1.36 per cent. If you need higher income now, consider higher-yielding food stocks.
High inflation is making it harder to make ends meet. Home-cooked meals are much less costly than eating in restaurants, of course. This favours food retailers such as Loblaw. Even so, some people are cutting back on their food and gasoline purchases so that they can pay their rent or mortgages. To serve these consumers, Loblaw operates discount chains such as No Frills. You won’t find 25 different kinds of ketchup there. But what they do carry is cheaper than it is in their full-service stores.
Continues to reinvest in its business
As Canada becomes more multicultural, food preferences are shifting. Loblaw is addressing these shifts. Breakfast cereal with cow’s milk, for instance, is unpopular among many Canadians with East Asian backgrounds. So Loblaw acquired a chain of grocery stores that specializes in Oriental foods. Likewise, it also acquired a company that specializes in Arabic and Mediterranean foods.
Loblaw continues to reinvest in its businesses. On June 3, it agreed to invest $170 million into Choice Properties to build a 1.2 million square foot “automated, multi-temperature industrial facility to add capacity and create new capabilities”. This facility connects to important highways. Choice Properties now has 6.5 million square feet under development. That’s equal to nearly 38 per cent of its current total of 17.2 million square feet in 114 industrial properties.
Loblaw remains a buy for further long-term share price gains as well as modest, but growing, dividends.
This is an edited version of an article that was originally published for subscribers in the July 29, 2022 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •9/8/22 •