3 Canadian Food Stocks to Consider Right Now


The writer of this article may or may not have positions in the securities below. Current positions of the writer had no influence on the outcome of the research or stocks listed inside of this article.

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 and grocery 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 (TSX:L)

Canada's Best Food Stocks - Loblaws

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 and COVID-19 pandemic. The stock fell from the high $30’s to $23 during the peak of the 08 crisis, but had returned to pre-crash levels within a couple years.

In the case of COVID-19, the stock actually increased in price, due to panic buying. There were a couple temporary setbacks in the stocks price, but it’s outperformed the TSX index by a significant margin in 2020, showcasing its defensive ability.

And to add to all of this, they pay a 1.85% yield. This isn’t ground breaking by any means, however the company is only paying 31% of earnings towards the dividend, and has an 8 year dividend growth streak. Lets look at Loblaws historical performance vs the TSX.

L 5 year dividend adjusted performance vs the TSX

TSX:L 5 Year DIvidend Adjusted Return Vs TSX
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Market Cap: $24.5 billion
Forward P/E: 15.98
Yield: 1.85%
Dividend Growth Streak: 8 years
Payout Ratio (Earnings): 31.11%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 4.90%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

For income and dividend growth: Metro Inc (MRU.TO)

Food and Beverage Companies Canada - Metro

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 15%. 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 centers to deliver a wider range of products with more efficiency.

Metro’s yield of 1.49% 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.

In terms of performance throughout 2020, Metro is one of the better stocks on this list of food companies. Year to date its up by 12.5%, and if you look at the 5 year chart below, they have significantly outperformed the overall markets over the last half decade.

MRU 5 year dividend adjusted performance vs the TSX

Metro 5 Year Dividend Adjusted Return Vs TSX
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Market Cap: $15.1 billion
Forward P/E: 18.37
Yield: 1.49%
Dividend Growth Streak: 25 years
Payout Ratio (Earnings): 28.21%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 11.11%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

For stock appreciation: Premium Brand Holdings (PBH.TO)

Best Canadian Food Stocks - Premium Brand Holdings

 

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 revenue by 9.7% in 2020, and a whopping 22% in 2021. Now, these are just estimates and subject to change, however the company has shown it’s capable of hitting these numbers in the past. So, we believe they could moving 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. 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.

This statement was definitely true during the COVID-19 crash back in March, when Premium Brands was hit very hard. The company lost over 37% of its stock price in just over a month. Those who didn’t panic sell and instead averaged down reaped the rewards however, as Premium Brands is nearly back to its pre-COVID price range.

In terms of performance, there isn’t another company on this list that even comes close to Premium Brands. Lets have a look.

PBH 5 year dividend adjusted performance vs the TSX

PBH vs TSX Chart 5 year dividend adjusted returns

Market Cap: $3.826 billion
Forward P/E: 34.37
Yield: 2.39%
Dividend Growth Streak: 8 years
Payout Ratio (Earnings): 84%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 10.50%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only