The COVID-19 pandemic has increased demand for groceries and other essentials. Loblaw same-store sales are expected to benefit from this demand.
Grocery companies have offered investors shelter in turbulent markets. A case in point is consumer goods stock Loblaw. By mid-April the S&P/TSX Composite Index was down 23 per cent from its high of February 20. Loblaw shares, by contrast, were up seven per cent at the time.
The rapid spread of the COVID-19 coronavirus initially caused panic buying by consumers as they snapped up toilet paper, paper towel, Kleenex, pasta and sauce, rice, vinegar, disinfectant wipes and other items. And those consumers also had to shift their consumption away from eating out to food prepared at home. Consequently, analysts began forecasting that same-store sales (SSS), or sales at stores open for a year or more, would likely accelerate in the first half of this year.
Loblaw Companies Limited (TSX—L) is a food and pharmacy leader, and Canada’s largest retailer. The company sells grocery, pharmacy, health and beauty, apparel, general merchandise, financial services and wireless mobile products and services. It operates through more than 2,400 corporate, franchised and associate-owned locations under banners such as Loblaws, No Frills, Maxi, Joe Fresh, T & T Supermarket and Shoppers Drug Mart.
Adjusted earnings and EPS up
For the year ended Dec. 31, 2019, Loblaw made $1.5 billion (adjusted), or $4.12 a share, compared with $1.7 billion, or $4.60 a share, in 2018. When normalized for the impact of depreciation related to the George Weston spin-off of 2018 and changes in accounting practices, adjusted earnings from continuing operations rose 3.4 per cent, while earnings per share were up 6.4 per cent. The latter increase included the favourable impact of share buybacks.
Revenue rose 2.9 per cent to $48.0 billion, thanks primarily due to a 2.8-per-cent increase in retail segment sales to $47.1 billion. Excluding the consolidation of franchises, retail sales rose 2.2 per cent due to positive SSS (same-store sales) growth of 1.1 per cent at food retail and 3.6 per cent at drug retail, as well as an increase in retail square footage. Financial services sales rose 10.5 per cent to $1.2 billion, mainly driven by higher interest and interchange income and higher sales at The Mobile Shop.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was up 39.2 per cent to $4.9 billion. Excluding changes in accounting practices, however, it was up 4.1 per cent. The increase was due to improvements in the retail and financial services segments.
The dividend is secure and may rise
We see little danger of Loblaw’s dividend being reduced or eliminated. Based on the company’s estimated earnings for 2020, its dividend payout ratio (dividend/earnings) is just 28 per cent. This leaves ample room for the dividend to be raised.
Loblaw intends to increase its dividend over the long term while retaining appropriate free cash flow to finance future growth. Even in a recession that lasts up to half a year, the company’s free cash flow is expected to exceed $1 billion.
Meanwhile, as we say above, the coronavirus should help accelerate SSS in this year’s first half. But this benefit will at least be partly offset by the temporary wage increase the company has given its employees as an incentive to work under current conditions. Still, we expect this consumer staples stock to hold up fairly well under recessionary conditions.
Loblaw should earn $4.55 a share in 2020, and it trades about 16 times that estimate. Its stock yields 1.7 per cent. Buy for growth and some income.
This is an edited version of an article that was originally published for subscribers in the April 17, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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