A Defensive Way to Build TFSA Wealth in 2018

Loblaw Companies Limited (TSX:L) has not missed earnings in 7 quarters. The wage increase in Ontario is a known quantity. Owning these shares is defensive and smart in 2018.

| More on:

Ontario’s minimum wage increase to $14 per hour will affect restaurants and other low margin businesses. The wage  is expected to rise again in 2019 to $15. Minimum wage has risen faster than usual in the last three years; this represents a 7% per year increase compared to a ~4% per year increase back in the mid-200s. Remember when minimum wage was $7.45, circa 2005?

For some context, the minimum wage in Denmark converts to above $22 CDN per hour; therefore, Ontario can still pay people more for work.

Loblaw Companies Limited (TSX:L) has been in the spotlight recently. With roughly 2,400 corporate, franchised and associate-owned locations, and being one of Canada’s largest private sector employers, the attention is warranted. Loblaw has 190,000 full and part-time employees, a figure that is virtually unchanged compared to four quarters ago.

Deriving a conclusion, it is true that the cost of business will increase in 2018 for Loblaw. The company generated $47 billion in revenue in the trailing 12 months (TTM) with $33 billion in costs for a gross profit of $14 billion. Quick calculations: the company made ~$73000 per employee, or $6 million per location in a year. The wage hike will cut into those profit margins. The market has known about this for months, however, which explains why the share price has already dropped substantially, as much as 17% below the 52-week high (summer 2017).

Things I like about Loblaw

  1. The enterprise value to EBITDA — a measure of efficiency and profitability — is currently well below 12 (a semi-arbitrary but helpful cut-off). When share price increases, then the enterprise value goes up. The EV/EBITDA ratio gives investors a more honest indication on whether earnings have kept up with the hype/momentum. In the U.S. markets, where valuations have been stretched, you would be hard-pressed to find EV/EBITDA’s this low without resorting to trolling for value traps or fishing for companies embroiled with bad press.
  2. Return on equity (ROE) is around 13%, which is not as impressive as the EV/EBITDA and is slightly below industry average. In my opinion, it is still business as usual as long as the ROE stays above 10%.
  3. The current ratio is a solid 1.45. A corresponding measure of financial leverage, debt-to-equity, is now 0.74 and below the company’s historic debt levels.
  4. The share price is awfully close to $66, which would be an absolute bargain share price.
  5. Looking forward, the company estimates earnings-per-share to increase in 2018 to $4.69 (keep in mind that Loblaw estimates have historically been pretty accurate). The industry average price-to-earnings (P/E) is around 22. If the Loblaw share price hits $66, then the forward price-to-earnings will be 14. My interpretation: strong value!

Opinion on Loblaw is decidedly mixed (here and here); I’m leaning toward the positive, but it is good to consider all sides. I will point out that MTY Food Group Inc. (TSX:MTY), which is more of a growth stock in the food sector, estimates EPS to drop in 2018, whereas Loblaw has EPS guiding upward.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brad Macintosh has no position in any of the stocks mentioned. The Motley Fool owns shares of MTY Food Group. MTY Food Group is a recommendation of Stock Advisor Canada.

More on Investing

money cash dividends
Stocks for Beginners

Where to Invest $10,000 in April 2024

If you've already created a diversified portfolio and are looking for more options from a windfall, here is where I…

Read more »

data analyze research
Investing

The Ultimate TSX Stock to Buy With $1,000 Right Now

Brookfield Asset Management (TSX:BAM) is one of the best Canadian stocks to buy for those looking to put capital to…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »