Food retailers are considered defensive stocks — a place to hide when markets become turbulent as they are in these days of pandemic.
The idea goes: Everybody needs food and will keep buying. Experience shows food retailing stocks are stable in rough markets.
Indeed, the three food retailers in the City of Moose Jaw’s stock portfolio held up better than most stocks in the $1.4 million loss in value from December 31 to March 31 in the Canadian stocks portion.
(The total value decline was $7 million including international equities and bonds.)
The question for investors becomes: should I fill my financial pantry with the three Canadian grocers?
The short answer is no. Share prices of these companies are no bargain; dividend yields range around a low 1.5 per cent.
Given the pandemic food buying spree they might appear as good investments.
Combined with the pandemic buying spree, often described as better than the high-volume Christmas season, are increased costs.
Pandemic regulations have required extra staff, danger pay increases, and costs to increase safety — all causing a drag on the bottom line.
Once the pandemic distancing relaxes and consumers realize they have zillions of toilet paper rolls, canned goods and pasta, sales should decline below previous levels as pantry inventory is reduced. Gas bar sales will be a drag too.
In a nutshell, these grocers face a reduction of the sales curve with higher costs.
Loblaws, largest of the three with over 2,000 food stores and 1,300 Shoppers Drugs stores at the recent price of $73.93, is only $3 off the high of the year.
The company operates Loblaws Real Canadian Superstore, Extra Foods, Shoppers, and other banners.
The price to earnings ratio of 25 to one seems rich for the low margin grocery business. Investors buying at the March low of $59.01 reaped a nice 25 per cent gain.
Empire Company, owner of Sobeys, Safeway, Freshco, Big Boy, in-store pharmacies and part owner of Crombie REIT, has almost 2,000 stores.
Priced at a recent $32.25, the shares are less than $5 from the high and trade at a 16 times price to earnings ratio.
Shares bought at the low of $23.88 on March 11 have gained 35 per cent.
Metro Inc., with 950 grocery stores and 650 drug stores in Quebec, Ontario and New Brunswick has a recent value of $61.75 and trades at a price/earnings ratio of 22 times. Investors buying at the low of $47.89 gained 28 per cent.
All three have low debt levels.
Long term potential exists from the pharmacy divisions as an aging population requires more medication. That along with stable growth in the food business bodes well for the future.
Those investors interested in the three food retailers might want to wait for: (a) another test of March lows, and (b) price declines once we find out how bad the flattening curve of grocery sales is.
The lessons from this: keep some cash powder dry for opportunities like March 12 and be patient.
CAUTION: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.
Ron Walter can be reached at [email protected]
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
