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Telus, Loblaws and needs vs. want investing

A diversified portfolio should be filled mostly with 'need' stocks. The companies sell things we need in all conditions.

Some years ago, a young colleague decided he needed a briefcase in order to be taken seriously. He shopped around and eventually settled on a handmade valise of Italian leather that cost $300.

The salesperson was very good and offered a deal – a second briefcase at 50% off, for a total of $450. That would reduce the average cost to $225. A fantastic 25% saving! My colleague bought them both.

He certainly didn’t need two briefcases and really didn’t need one. He quickly regretted the  purchases and his receptiveness to the salesman’s pitch.

Investors often make the same mistake, confusing a need with a want and acting impulsively. A need is something that is necessary or essential and is consumed or produced in all conditions. It is often not very sexy. Household goods like soap and cleaners, groceries, healthcare and medicines, banking and insurance, utilities, infrastructure, and real estate are examples.

There’s more pizzazz in a want because it is often new and sounds exciting. The possibilities grab headlines. Travel and leisure, sports and entertainment, emerging technologies, Cannabis, crypto currencies, online gaming and space exploration are examples.

A conservative, diversified portfolio should be filled mostly with need stocks. They thrive in good and bad times, usually paying dividends. The companies have the resources to exploit new opportunities as they arise and the ability to withstand downturns.

Want stocks have their place but only as a small portion of more aggressive holdings. They often do not pay dividends, have a short track record, and while holding promise, may not be profitable.

Telus Corp. (TSX:T) and Loblaw Cos. Ltd. (TSX:L) are good examples of companies in the “needs” category. Telus is Canada’s second largest wireless telecom provider. Loblaws is Canada’s biggest grocer. Both came out of the pandemic stronger. Their share appreciations since the March 2020 market bottom are 44% and 65% respectively at the time of writing.  

Both raised their dividends during the pandemic and used the adverse conditions to strengthen their core businesses and invest in new ones. Telehealth is an area where both are pouring resources.

Telus (C$32.14 Mar. 30) core business includes internet and mobile phone service though the Telus and Koodo brands. It recently spun off Telus International, which provides IT and customer service and is using that model to grow healthcare and agriculture businesses with an eye to spinning them off as well.

The shares are up 8% year-to-date and 27% in the past 12 months.

Telus ended 2021 on a high with strong fourth-quarter results. It reported $4.87 billion in revenue for the three months ended Dec. 31, up 20% from a year ago. The $663 million in earnings was an increase of 145%. 

The expansion of its fibre-optic network helped attract more customers and it expects to increase its operating revenue by 8% to 10% this year.

Telus has been growing its telehealth business for the past 13 years. It helps doctors, dentists, and clinics manage bookings and organize records. It also helps medical professionals connect with patients via phone and internet.

At the end of 2021, Telus had 2.8 million people enrolled in its virtual care services, an increase of 1.1 million from a year earlier. For the year, it had 20.6 million enrolments in various health programs including virtual care, health benefits management, preventative care, and personal health security. That’s an annual increase of 21.6%.

Annual health services revenue increased by 16.3% to $521 million.

The spin-off of Telus International (NYSE: TIXT) last year was a model Telus plans to use. Telus International helps companies including Fitbit, Uber, and online gamer Zynga moderate online content including customer service chat robots. Telus retains a large stake in TIXT.

Telus Health and Telus Agriculture are being groomed for similar treatment. In the meantime, strong performance in its core telecom business gives Telus time and money to nurture these new ventures.

Telus raised its dividend 5.6% with the January payment to $0.327 quarterly. It yields 4.06% at current prices.

Loblaw Cos. Ltd. ( $110.92 Mar. 30) had annual revenues of $53.2 billion in its latest 12 months. Its brands include Loblaws, No Frills, Provigo, Valu-Mart, Fortino’s and Real Canadian. It is 47% owned by George Weston Ltd. 

The shares are up 7% year to-date and 62% in the last 52 weeks.

For 2021, revenue was 1% higher than a year earlier with the reporting year having one less week than 2020. Adjusted net earnings per share rose 34% to nearly $5.59. Stay-at-home trends and successive pandemic waves favored in-home dining and higher average grocery bills.

Groceries are a mature, thin margin business so Loblaws is trying to grow through telehealth using its Shopper Drug Mart chain as a spring board.

Shoppers can connect patients to doctors, pharmacists, physiotherapists, and others via its online platform, which it acquired in 2020 through the purchase of Maple Corp. The platform facilitates consultations through the Shoppers website for such things as skin problems, allergies, and infections. Another partnership with League Ltd., enables live chats with nurses, dietitians, and others who can refer users to doctors, mental health support, and vision care. The management discussion of the results notes that pharmacy services revenue grew 172% in 2021.

Subsequent to its year end, Loblaws announced the acquisition of Lifemark Health Group for $845 million. Lifemark owns more than 300 Canadian clinics, providing such things as physiotherapy and chiropractic treatments and mental health care. For Shoppers, the deal adds a network of thousands of individual healthcare professionals, with distinct, but complementary expertise.

Loblaws increased its dividend last July to $1.46 annually. It yields 1.3% at current prices. It also has an active share repurchase program.

This is an edited version of article that appeared in the Internet Wealth Builder on March 28, 2022.  For information on how to reprint this article please view this page.

Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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