When we think of defensive stocks, especially in 2020, we often think of consumer staple stocks that deal in things like groceries, toilet paper, alcohol, and cleaning supplies. More often than not, these are reliable Canadian dividend stocks, and most have achieved Aristocrat status here in Canada.
Interestingly enough, there is a popular Canadian stock in the food processing sector that has struggled quite a bit this year, and that is Saputo (TSE:SAP).
The stock is down 21% year to date, underperforming the TSX by a wide margin, and Canadian investors are wondering if it’s worth grabbing the stock as a value play.
In this article I’m going to try and find out for you. Let’s get started.
Saputo (TSE:SAP) is one of Canada’s largest food processors
Saputo produces, markets, and distributes a wide array of dairy products. Products that include things like cheese, milk and cream, cultured products, and diary ingredients.
Not only is Saputo one of the largest diary producers in the world, it’s the leading cheese manufacturer in Canada, Australia, and second largest in Argentina.
In terms of the United States, it is a top three cheese producer. The company generates the bulk of its revenue from the United States, nearly half in fact.
The company’s brands include Saputo, Armstrong, Frigo, and Stella.
Why has Saputo stock struggled so much in 2020?
The pandemic has effected all companies here in Canada, some more than others.
Saputo filed third quarter earnings in early November, and the numbers weren’t strong, although they weren’t downright disappointing either. The company missed on both top and bottom line expectations by high single digits, and it is clear that the shutdowns of restaurants and the lack of dining out is having a significant effect on the company.
The company stated that its foodservice market segment continues to struggle and the panic buying it witnessed in the first quarter of 2020 is starting to level out.
As a result, revenue and earnings are down by 3.2% and 5.5% respectively when compared to the first 9 months of 2019.
Over the last 4 years, Saputo has had a compound annual growth rate on revenue of around 7.6%. So, it’s fairly evident the company’s top line is being hit hard by the pandemic.
In my opinion, I’m cautiously optimistic about this setback in Saputo’s top and bottom lines being temporary. There is no doubt the pandemic is going to cause a permanent shift in consumer demand and less people may eat out after the pandemic is done.
However, the company stated in the quarter that at least in Canada, retail sales are more than offsetting decreasing volumes in its foodservice segment.
“The Canada Sector benefited from increased sales volumes in the retail market segment, which more than offset decreased sales volumes in the foodservice market segment.”
So with this in mind, how safe is Saputo’s dividend?
With decreasing earnings, is Saputo’s dividend safe?
Saputo’s current dividend is well covered, indicating that even in the event that the company’s earnings continue to fall, which I don’t think they will, investors have nothing to worry about in terms of dividend payments.
As of right now, the company is paying out 43% of its earnings towards the dividend. When we look at the dividend in terms of cash flows, it gets even better. The company is paying out only 38.83% of free cash flow towards the dividend.
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Market Cap: $14.10 billion
Forward P/E: 19.61
Dividend Growth Streak: 20 years
Payout Ratio (Earnings): 43.21%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 3.10%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
In terms of yield, the company is currently yielding around 2%. If we look to the chart above, we can clearly see that Saputo’s dividend yield has been on a pretty consistent rise over the last 5 years.
This is both a good sign, and a bad sign. But, let’s go over why it’s good first.
Saputo has a dividend growth streak of 20 years. This lands them in the top 15 Canadian stocks in terms of dividend growth streaks, an admirable feat.
Over the last 5 years Saputo has grown the dividend at a 6.50% annual rate. This is right in line with earnings and revenue growth, so this is actually a very respectable dividend growth rate for a company of this size.
But, we need to get on to the bad news. A rising dividend and a rising yield can only mean one thing. The stock price is either flat, or it’s decreasing. In Saputo’s case, it’s been relatively flat in terms of shareholder returns over the last half decade.
Saputo on a dividend adjusted basis has returned 11.1% to shareholders over the last 5 years. When we consider the fact the TSX Index has returned 25.7% over this same time period, this is a significant underperformance in and of itself.
However, it gets even worse when you consider the fact that the TSX has outperformed the company significantly over a bear market in oil, which makes up a large chunk of the index.
Dividend safety and yield is only one piece of the puzzle. The most important thing we need to understand as investors is that overall return is the only thing that matters. And over the last half decade, Saputo hasn’t provided Canadians with strong returns.
Overall, Saputo could be a short term value play
In my opinion, there are plenty of other defensive options that Canadians can buy that are not only growing their dividends at a faster pace, but are also returning much more to shareholders via stock appreciation. Or if stability is your game, possibly Canadian financials might interest you. We recently reviewed Canadian Western Bank (TSE:CWB).
I do expect the company to recover from the headwinds it’s facing due to the pandemic, and as a result it does present itself as somewhat of a short term value play. As of writing, analysts figure there is near 20% upside in Saputo’s price today, and in terms of historical numbers, Saputo is trading at a 30% discount to its 5 year historical price to sales, and a 17% discount to its 5 year historical forward price to earnings.
As we know though, it can take years for a company to reflect true value, and if you’re looking to invest in Saputo for this reason, I can’t stress enough you may need a lot of patience.