A defensive consumer stock with a low beta

Loblaw Companies is a very conservative defensive consumer stock with a low beta of 0.518 which makes it an excellent choice for income investors seeking stocks that are considerably less volatile than the over-all market. But what is a stock’s beta and what does it mean?

The overall trend in equity markets is important to income investors, because many of the stocks they buy have a beta close to +1.00.

A beta of +1.00 means that a stock tends to move very close to the same speed and the same direction as the overall market. It’s like a one-to-one relationship: if the overall market moves up by, say, 3.1 per cent, the stock will move up by 3.1 per cent, more or less, over the long term.

Yes, individual stocks and entire sectors of stocks, even those with betas of +1.00, can take a very different path from the overall index in the short term and even in the medium term. But there’s no denying that the big, blue-chip dividend paying stocks basically are the market, or at least make up a big proportion of the index, and those are the stocks income investors buy.

So let’s see how the markets have been doing lately. We know that the S&P/TSX Composite Index was down from the start of the year to about the middle of January, and after that it began a terrific rise. It then began to pull back in June and rise again before the Brexit vote sent it into a tailspin. Not long after that, however, it moved on to fresh highs over the summer months.

The TSX over the last three months

But though the TSX made some new highs over the summer, the trend in recent months has generally been sideways. The index made a high of 14,856 on August 11, but settled into the 14,500 range for the rest of the month. In mid-September it suffered a small pullback, which brought it to about 14,320. Since then, it rebounded before settling back into the 14,500 range once again.

The good news, if you hate volatility, is that September did not live up to its reputation as the worst-performing month for stocks. This year, the TSX ended the month up 0.3 per cent.

We’re not out of the woods yet, though, because we still have to make it through the fourth quarter. Though markets have generally performed better in October than September, October has the reputation of inflicting some of the worst damage on stock prices in history. The 1929 and 1987 crashes both occurred in October.

Given current stock valuations and the potential risks to the global economy and markets, we wouldn’t be surprised to see a correction. But we’ll have to wait and see.

By and large, the top-two performing sectors for the year continued to dominate in September. The energy sector took the lead from the materials sector to close out the month up 3.5 per cent. The materials sector, though, wasn’t far behind, with a gain of 2.4 per cent.

There was some evidence of sector rotation, however, as the strong year-to-date performances of the telecommunications and utilities sectors gave way to losses in September. Telecom suffered a 0.6-per-cent loss for the month, while the utilities sector suffered a heftier loss of 4.0 per cent.

Lower inflation hurts Loblaw

A very conservative blue chip stock in the consumer sector that is considerably less volatile than the market is Loblaw Companies (TSX—L) with a low beta of 0.518.

Its shares have declined about 10 per cent since it delivered better-than-expected financial results in late July. At the time, however, the company did note that near-term underlying growth will likely be modest, as efficiency gains are partly offset by slower revenue growth thanks to moderating inflation.

Loblaw Companies is a nationwide food and pharmacy leader, with a network of corporate and independently-operated grocery and drug stores across Canada.

For the 24 weeks ended June 18, 2016, Loblaw made $750 million (adjusted net earnings available to common shareholders), or $1.82 a share, compared with $651 million, or $1.56 a share, in the similar period of 2015. The increase was primarily due to an improved performance in the retail segment, additional synergies of $58 million, a decrease of $9 million in interest expense and other financing charges due to lower debt, and a decrease in depreciation and amortization of $24 million.

Despite moderating inflation, Loblaw is still on track to grow its adjusted earnings these next couple of years.

Loblaw trades around a reasonable 16.8 times the $3.98 a share it will probably earn in 2016. Its current annual dividend of $1.04 a share yields 1.6 per cent. This very conservative blue chip consumer stock is a buy for growth and income.

 

Money Reporter, MPL Communications Inc.
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