Loblaw, Metro deliver returns

One place investors have found conservative growth and dividend income is at the grocery store.

While political theatre brought the Big Three to Ottawa for a knuckle rap last fall, nothing changed. The pandemic was a huge energizer for them with stay-at-home trends playing to their strengths.

Together the Big Three control 60% of national grocery sales and Loblaw Co. Ltd., (TSX: L), the largest, delivered the most to investors. In the three years between January 2020 and January 2023, when life got back to normal, Loblaw’s shares rose 79%. Metro Inc. (TSX: MRU) was a distant second with a 39% increase.  Empire Co. Ltd. (TSX: EMP), the second chain largest by sales, lagged with a 15% rise.

All three increased their dividends with Metro announcing another increase with its latest earnings, to $0.335 per quarter.

The stocks took a breather in 2023. There was more dining out and less cooking at home. Only Loblaw ended 2023 higher, with its shares up 6%. Metro and Empire were flat, down less than half of 1%.

So, what’s up for this year? Consumers are feeling the pinch of food inflation and the economy is slowing. In consequence, shoppers are shifting down to no name or house brands over pricier national brands. This is good news for the grocers because house brands are more profitable. The companies are adapting by opening more discount stores, which have lower labor costs, and expanding the range of in-house products.

Other energizers include gradually falling interest rates, which make their dividends relatively more attractive. Stay-at-home work trends are proving stickier than many thought. Many companies are continuing with a hybrid office and home work model.

Loblaws has the highest proportion of discount stores and high recognition of its No Name and President’s Choice house brands. Metro counters with its Selection and Irresistibles brands and Food Basic and Super C discount banners.  Both companies have tie-ins with wholly owned drug store chains.

Empire continues to face headwinds from its takeover of Safeway and, while it is the second largest grocer, it has the fewest discount stores. Sobey’s, Longo’s, Safeway, and Farm Boy banners are largely full service. They are more costly to run with tighter margins. 

Here are some grocery updates:

Loblaw Cos. Ltd. (TSX-L) is Canada’s largest grocer with $56.5 billion in annual sales and brands that include No Frills, Provigo, Valu-Mart, Fortino’s, and Real Canadian. It is 53% owned by George Weston Ltd. 

Performance: The shares are up 5% year-to-date.

Earnings: Loblaw reported revenue of $18.3 billion in its third quarter, ending Oct. 7. That was up 5% from the prior year period. Net earnings grew to $621-million, or $1.95 per share.

Recent developments: Loblaw gets about 60% of sales from its discount stores and is opening more of them. Kathleen Wong, a retail analyst at Veritas Research Corp. in Toronto, said in a recent report that Loblaw converted 24 Provigos to Maxi discount stores in 2023 with plans for another 30 conversions in 2024. These converted stores continue to report higher-than-expected sales growth.

RBC Capital markets analyst Irene Nattel said in a note that Loblaw is “exceptionally well-positioned” with sector-leading exposure to discount buying trends and its private-label brands. Its PC Optimum loyalty program is also a leader with 16 million users. While online ordering and pickup has plateaued, she sees the technology investment as helping Loblaw expand its online health services through Shoppers Drug Mart.

Ms. Wong sees Loblaw with an intrinsic value of $138 and Ms. Nattel has a price target of $170.

Dividend: Loblaws increased its dividend last July to 40.5 cents quarterly, its 11^th consecutive annual increase.

Metro Inc. (TSX: MRU) is Canada’s third largest grocer with annual sales of $20.7 billion. About  71% of its stores in Quebec and the remaining 29% in Ontario. Its banners include Metro, Super C, and Food Basics. Like Loblaw it owns drugstore which include the Jean Coutu, Metro Pharmacy, and Food Basics Pharmacy banners. About 80% of its pharmacies are in Quebec.

Performance: The shares are up 2% year-to-date.

Recent developments: Metro reported first quarter 2024 earnings Jan. 29 with  $4.97 billion in sales for the three months to Dec. 23. That is a 6.5% increase from the prior year. Adjusted net earnings were $235 million, down 1.1%.

Dividend: Metro announced a 10.7% increase in its quarterly dividend with the results. Metro has increased its dividend for the last 24 years. The new $1.34 annual rate ($0.335 quarterly) is yielding 1.79%.

This article appeared in the Internet Wealth Builder on Feb 5, 2024.  For information on how to reprint this article please view this page.