Canadian grocers have become extremely popular investments in 2020. At least they did during the heat of the pandemic as Canadians rushed to grocery stores and hoarded what critical supplies they could get their hands on.
As a result, Canadian stocks that focused on groceries and essential goods spiked. It should have been evident to many Canadians that these grocers earning spikes would be temporary, if not even offset by the amount of capital expenditures required to ensure safe shopping, and the safety of their employees.
Most of these grocery style stocks have struggled through the remainder of 2020 and many are asking if they are still a buy today. In my opinion, they’re solid defensive stocks that although won’t provide outstanding returns, they pay reliable dividends and expose investors to lower levels of volatility.
In this article however, I’m going to focus on more of a growth style play in the industry, and a particular stock that we recommended to Stocktrades Premium members in late 2018 that has done very well since.
That stock is Premium Brand Holdings (TSE:PBH).
What does Premium Brand Holdings (TSE:PBH) do?
Premium Brand Holdings is a smaller, more niche grocery play here in Canada and the United States. The company focuses on specialty food manufacturing and differentiated food distribution businesses.
A few of its most popular brands include Piller’s, McSweeney’s, Hygaard, and Harvest Meats, though the company has several more brands in both the processing and distribution areas.
The company has a presence in every Canadian province, but also has sales in Arizona, Minnesota, Mississippi, Ohio, and Washington. Overall, it serves over 22,000 customers.
How has Premium Brand Holdings grown so much?
Market Cap: $4.44 billion
Forward P/E: 34.89
Dividend Growth Streak: 7 years
Payout Ratio (Earnings): 84.00%
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
If we look to the chart, we can see that Premium Brand Holdings has clearly outperformed the index over the last 5 years, by a significant margin.
And if we look to the company’s overall sales growth, it looks even better:
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Premium Brand Holdings has grown its top line by a whopping 183% over the last 5 years, going from $293 million in sales in 2015 to $836 million in its last quarter.
How has it done this? Through an aggressive and efficient growth via acquisition strategy.
The company’s overall growth plan is quite simple. Target segments of the food industry that deliver specialty, authentic, or differentiated products and services, along with targeting emerging trends.
Its most recent acquisition of Clearwater Seafoods fits right into this mold. In fact, the company states the acquisition will be immediately accretive and will provide double-digit earnings per share accretion for Premium Brands.
The acquisition of Clearwater will also create an industry-leading global seafood giant, which is expected to generate more than $1.3 billion in annual sales, of which nearly 90% are located outside of Canada.
It’s acquisitions like this which continue to drive the company’s overall growth, and will likely continue to do so in the future.
I have a soft spot for companies that can execute an acquisition style strategy as efficiently as Premium Brands. Especially because it tends to lead to growth rates that are simply not achievable via organic growth.
Premium Brand Holdings has a wide product base, and diversified sales
Premium Brands multitude of overall brands leads to a wide product base, including 43.1% of it being varying types of protein, 20.7% being sandwiches, and 15% being seafood.
This reduces the company’s overall risk for single product commodity prices to fall and affect its top and bottom line.
The company also has a wide variety of customers, with 49% of its sales coming from its top 10 customers, with only 2 of those accounting for double digit sales. This too lowers the company’s overall risk. In the event of losing a major customer, it wouldn’t have as big of an impact on the company’s overall operations.
And finally, the company has strong exposure south of the border, which not only exposes it to a much larger market in terms of population, but also a stronger currency. 37.8% of the company’s sales in 2019 came from the United States.
The niche food company also pays a lucrative dividend
Premium Brand Holdings is a Canadian Dividend Aristocrat, having raised dividends for 7 consecutive years. The company also pays a respectable 2.27% yield. Many investors primarily looking for income may frown upon a yield this low.
With that said, it’s really important we look at total return here.
I’m willing to accept a smaller dividend yield in a situation like this, considering the company has a compound annual growth rate in terms of share price of 21.33% annually over the last 5 years.
To add to this exceptional growth in terms of share price, the company has also been growing its dividend at a double digit clip annually over the last 5 years, 10.90% to be exact.
A 21% annual increase in share price and a double digit dividend growth rate is an investor dream. However, I don’t expect this to keep up moving forward in terms of dividend growth.
The company is currently paying out around 85% of earnings towards the dividend, and 70% of free cash flows. If the company is going to continue to focus on an acquisition style growth strategy, there likely won’t be enough room to grow the dividend at this rate as well as continue to fund its growth.
In my opinion, we’ll see Premium brands move towards mid to high single digit dividend growth in the future.
Overall, Premium Brands is a solid growth play
If you’re purchasing a company like Premium Brands as a defensive option in the consumer staple sector, you likely haven’t researched this company enough.
It provides niche products and food, ones that are not typically sold at discounted prices. So when times get tough, it’s likely that customers may opt for cheaper outlets like Loblaws to buy essential goods. As a result, this stock isn’t as “defensive” as you think.
However, this is a company I think is going to continue to grow at a solid clip moving forward simply due to the fact that it has proven time and time again to be able to not only acquire solid companies, but integrate them into operations seamlessly and continue to drive revenue and earnings growth. That smooth operation and growth takes a well rounded management team and not every company has them as we have seen from companies like Aurora Cannabis (TSE:ACB) in the past.
And to add to that, the company pays a pretty healthy dividend, one that’s well covered by earnings and cash flows.