Which Grocery Retailer Belongs in Your Portfolio?

Selling groceries in Canada is a steady business. Demand is of course fairly consistent, and doesn’t swing wildly based on the economy. The established retailers already have the best real estate, helping to fend off competition. Walmart does not have as much of a presence in Canada as it does in the United States, and is thus not as much of a threat. And there is still little threat from selling groceries online.

For those who put a premium on safety, Canada’s grocers are certainly worth considering. But which one in particular? Each one has its own advantages and disadvantages.

Metro: The best track record

When it comes to selling food, very few companies have done as good a job as Metro Inc. (TSX:MRU). The company has achieved a return on equity of at least 14% every year for the past two decades, even through the worst of the financial crisis. Over this same time period, the company has raised its dividend every single year.

There are two drawbacks to Metro. One is that growth is hard to come by. Total revenue has been flat for the last three years. The other is price. Metro shares, which traded at about $45 in late 2011, now trade over $60. At 15 times earnings, the stock is pricing in a lot of the company’s past success.

Empire: Promising growth

Having just completed its acquisition of Safeway’s Canadian stores, this is a very exciting time for Nova Scotia-based Empire Company Ltd (TSX:EMP.A), which also owns the Sobeys chain. The move, which cost the company $5.8 billion, allows the company to gain a much stronger foothold in Western Canada, which was an area of relative weakness before the acquisition. Around the same time, Paul Sobey announced his retirement after 15 years as Empire’s CEO.

Empire trades at a relatively similar multiple to Metro. This makes the trade-off quite simple – Empire certainly has a lot more excitement surrounding the company, with more potential for growth. But there is also greater risk from integrating 213 new stores from Safeway. Meanwhile Metro may be more boring, but offers greater stability.

Loblaw: The leader

Canada’s leading grocery retailer, Loblaw Companies Ltd (TSX:L), has experienced plenty of ups and downs over the past decade. The company did a poor job adjusting to Walmart’s expansion into grocery sales, then got hurt more than its peers by the financial crisis. By late 2012, no one seemed to want the shares, which were trading for little more than its stores’ real estate value.

The tide turned for Loblaw when it announced the creation of a REIT, and later generated a lot of noise with its acquisition of Shoppers Drug Mart. Loblaw is also busy installing SAP systems across its vast grocery network, which will not be easy.

Despite being the industry leader, Loblaw is arguably going through more changes than any of its competitors. The good news is that with the stock trading at $45, there is still plenty of upside if the company executes well.

Foolish bottom line

By almost any standard, Canada’s three leading grocers make for relatively conservative investments. Those kinds of companies are not that easy to find in Canada. So investors who prefer safety over excitement should consider these names. Interested investors should also check out my colleague Nelson Smith’s recent article on his favorite company in this space.