Humans need food to survive. As such, the food and beverage sector of the stock market is often thought of as defensive in nature.
In some cases this is true…
Major Canadian food stocks will often perform in both poor and strong economies due to the fact companies employ a low margin, high volume strategy. This allows the retailer to lower costs and outperform smaller food companies. Remember when you were first learning how to invest in stocks and people would tell you to “invest in what you know.” Food stocks fall under this category, and as such are extremely popular.
But, don’t get the wrong impression about food stocks here in Canada. There are some that can give Canadian investors extremely valuable growth. In this article we’re going to be going over 4 Canadian stocks that focus on food that investors need to be looking at in 2020. Each food and beverage stock will bring something different to the table, (no pun intended).
Our top Canadian food stocks for 2020
For economic uncertainty: Loblaws (L.TO)
Loblaws (TSX:L) is one of Canada’s iconic brands. Loblaws is a holding company that operates in a wide variety of industries. From grocery stores to financing services, the company provides a wide variety of products to Canadian consumers.
Loblaws owns more than 2300 stores, and the food and beverage company’s ability to survive during practically any economic condition can be attributed to extremely strong brands, both premium and discount related.
Loblaws owns popular chain stores like Shoppers Drug Mart, No Frills and the Real Canadian Superstore. Discount brands such as No Name and Presidents Choice allow the company to generate strong revenue even during poor economic conditions.
There are a lot of investors who are bearish on brick and mortar retail stores right now, especially with the emergence of Amazon. However, Loblaws is doing well to counter this, partnering with Instacart and entering the digital market.
Those who want proof of Loblaw’s ability to thrive during economic downturns should look no further than the 2008 financial crisis. The stock fell from the high $30’s to $23 during the peak of the crisis, but had returned to pre-crash levels within a couple years. The stock pays a modest 1.71% dividend.
For dividend growth: Metro Inc (MRU.TO)
With a dividend growth streak that spans 2 and half decades, Canadian Dividend Aristocrat Metro is the most reliable food stock in Canada when looking for dividend growth. Over the past 5 years, the company has a 5 year annual dividend growth rate of around 14%. And even though its most recent increase of 11% falls shy of its 5 year average, it is still growing at a reasonable rate.
Metro Inc (TSX:MRU) is one of the largest grocery and pharmacy companies in Canada. The company operates under various grocery banners in the supermarket and discount segments. Brand names include Metro, Food Basics, Super C, Brunet and Jean Coutu Group.
One key concept that often goes unnoticed with Metro is the fact the company owns the vast majority of its properties. This could allow the food and beverage giant to monetize via REIT conversion like other major retailers Loblaws and Canadian Tire have done with success.
The company has over 950 food stores and 650 drugstores. Consumers in the western part of Canada may be unaware of Metro however, as most of its stores are in eastern Canada. The company is aggressively pursuing lower labor costs via self checkouts, and is adding new distribution centres to deliver a wider range of products with more efficiency.
Metro’s yield of 1.50% isn’t ground breaking, but considering its strong dividend growth streak we still like the company. Not only does it provide a strong defensive position in times of economic uncertainty, but you can bank on the company paying you more in the form of a dividend every year.
For stock appreciation: Premium Brand Holdings (PBH.TO)
Premium Brand Holdings (TSX:PBH) owns a range of specialty food manufacturing and food distribution businesses. It has operations on both sides of the border with dozens of brands under management. The company’s segments include Specialty Foods and Premium Food Distribution.
The company has grown from a small Canadian company to a North American conglomerate. It has 12 product categories, none accounting for more than 25% of sales. The company is also a Canadian Dividend Aristocrat, having raised dividends for 8 straight years. Although this isn’t as long as our previous stock Metro, considering the growth of the company, we don’t mind.
Premium Brands has been described as a serial acquirer, and since 2006, there isn’t many years where the company hasn’t made at least 2 acquisitions. As such, the company’s earnings have been increasing at a rapid pace. Premium Brand’s earnings have grown at a CAGR (compound annual growth rate) of over fifty percent in the last 5 years.
This is primarily why the food stocks price has more than quadrupled over that time frame, and analysts are quite bullish on the stock moving forward. They expect Premium Brands to grow earnings at a clip of 23.90% next year, and 24% annually over the next 5 years.
In the case of a downturn, you can expect Premium Brands to undergo significant volatility compared to our other Canadian food stocks on this list. This is primarily due to the fact that Premium Brands doesn’t have a strong discount brand presence, and as such consumers may head to cheaper variants like Loblaws.
For dividends: The North West Company Inc (TSX:NWC)
North West Company (TSX:NWC) is one of the leading retailers in rural communities and neighbourhood markets in Northern and Western Canada, Alaska, the South Pacific Islands and the Caribbean.
The company operates under brands such as Northern, NorthMart, Giant Tiger and Alaska Commercial. It sports one of the best dividends out of all food stocks in Canada at 4.78%. The dividend is also well covered with a payout ratio of 80%, and it makes up around 46% of the company’s operating cash flows.
The argument against NWC is the fact that growth is stalling, and people who bring this argument up aren’t necessarily wrong. Revenue has somewhat flat lined over the last four years with revenue of 1.8B, 1.84B, 1.99B and 2.01B. This represents a CAGR of only 2.67%.
Despite slowing growth, the company is growing earnings at a more respectable rate of around 6% annually over the last four years. The company is doing so by improving operational efficiencies. The issue with this, is there is only a finite amount you can improve efficiency. So, there will come a time where the company will have to improve its top line in order to increases its bottom line as well.
For now, The North West Company remains one of the best food stocks here in Canada in terms of dividends, but I wouldn’t expect much growth with the company moving forward.