Major Canadian grocery and food stocks on the Toronto Stock Exchange will often perform in poor and strong economies because companies employ a low-margin, high-volume strategy.
This allows the retailer to lower costs and outperform smaller food companies.
Remember when you first learned how to invest in stocks, and people would tell you to "invest in what you know." Food and grocery stocks fall under this category and, as such, are extremely popular.
But don't get the wrong impression about food stocks here in Canada. Some can give Canadian investors precious growth.
In this article, we will be going over 3 Canadian stocks that focus on food and grocery that investors need to look at. Each food and beverage stock will bring something different to the table (no pun intended).
What are the best grocery stocks to own right now?
Humans need food to survive. As such, the food and beverage sector of the stock market is often thought of as in nature.
Loblaws (TSX:L) is one of Canada's iconic brands and largest food retailer. It is a holding company and a segment of George Weston that operates in various industries. From grocery stores to financing services, the company provides various products to Canadian consumers via its Shoppers Drug Mart segment, including healthcare products.
Loblaws owns more than 2400 stores, and the food and beverage company's ability to survive practically any economic condition can be attributed to powerful brands, both premium and discount-related.
Many investors are bearish on brick-and-mortar retail stores right now, especially with the emergence of Amazon. However, Loblaw is doing well to counter this, as it delivers strong e-commerce growth.
Those who want proof of Loblaw's ability to thrive during economic downturns should look no further than the 2008 financial crisis and the COVID-19 pandemic. The stock fell from the high $ 30s to $23 during the peak of the 08 crisis but returned to pre-crash levels within a couple of years.
In the case of COVID-19, the stock increased in price due to panic buying.
If we were to enter a recession, Loblaw likely has the most significant "discount" factor and largest economic moat out of all major grocers. Most Canadians are, on average, 10km from a Loblaw store.
During penny-pinching situations, you will likely see consumers head to stores like Superstore and No Frills over Sobeys, owned by Empire Company (TSE:EMP).
With a market cap of just over $40B, this is the largest grocer in the country and a blue-chip option for those looking for a defensive stock. However, if you're looking for high income, you may be disappointed with Loblaw. It only has a dividend yield of around 1.3%.
Metro Inc (TSE:MRU)
Over the past five years, the supermarket chain has a 5-year annual dividend growth rate of around 6%. Metro Inc (TSX:MRU) is one of Canada's largest grocery and pharmacy companies.
The firm also acts as a distributor, leveraging its supply chain capabilities to service smaller neighbourhood grocery stores. Most of its operations are in Quebec, which houses over 70% of its owned and franchised food and drug outlets.
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 that the company owns most of its real estate properties. This could allow the food retail and beverage giant to monetize via REIT conversions like other major retailers, Loblaws and Canadian Tire, have done with success.
The company has over 950 food stores and 650 drugstores. However, consumers in western Canada may be unaware of Metro, as most of its stores are in eastern Canada.
The company is aggressively pursuing lower labour costs via self-checkouts. It is adding new distribution centers to deliver a broader range of products more efficiently.
Metro's yield of 1.6% isn't groundbreaking, 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.
Premium Brand Holdings (TSE:PBH)
Premium Brand Holdings(TSX:PBH) owns specialty food manufacturing and 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 Specialty Foods segment consists of its speciality food manufacturing businesses, contributing about two-thirds of its revenue.
The Premium Food Distribution segment comprises the company's distribution and wholesale businesses.
The company has grown from a small Canadian company to a North American conglomerate. It is also a Canadian Dividend Aristocrat, having raised dividends for ten straight years. Although this isn't as long as our previous stock Metro, considering the company's growth, we don't mind.
Premium Brands has been described as a serial acquirer. Since 2006, there aren't many years where the company hasn't made at least two acquisitions.
As such, the company's earnings have been increasing rapidly. Premium Brand's net income has grown from $80M in 2017 to over $160M to close out 2022.
Analysts are not expecting this growth to slow anytime soon either. Many have double-digit revenue and earnings growth projected until 2025.
Now, these are just estimates and subject to change, however, the company has shown it can hit these numbers in the past. So, we believe they could move forward.
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. We witnessed it during the bear market of 2022.
This is primarily because Premium Brands doesn't have a strong discount brand presence, and consumers may head to cheaper variants like Loblaws. Along with this, the company also caters to events. In a recession, we could see a slowdown in bookings.
The volatility statement was definitely true during the COVID-19 crash back in March 2020, when Premium Brands was hit very hard. The company lost over 37% of its stock price in just over a month.
This is a higher risk/higher reward option for those looking to buy a niche Canadian grocery stock.
Overall, exposure to the food and grocery sector here in Canada should result in lower volatility
There are plenty of other opportunities in regard to the food industry here in Canada. For example, you could look at GoodFood Market for exposure to food delivery and food boxes. Or you could take a peek at Alimentation Couche-Tard, one of the largest Canadian companies today, for exposure to convenience stores.
But with the ones on this list, particularly Metro and Loblaw, they should provide you with low beta options in times of economic uncertainty.