Consumer staples don’t get much closer to the realm of true defensiveness than food producers. However, the following three Canadian stocks, while representing some of the best such investments to be found on the TSX index, might need to be approached with caution by the long-term value investor with little appetite for risk.
Rogers Sugar (TSX:RSI)
TSX index investors who like to pay attention to peer confidence should note that more shares have been snapped up than sold by Rogers Sugar insiders over the last few months, as indeed they have for the past year. A stock with a strong one-year track record in earnings growth, with a rate of 47.1%, Rogers Sugar pays a sweet dividend yield of 5.94%.
Slightly negative expected annual growth in earnings would be the main red flag here. A five-year average past earnings growth of 7.4% does signify a positive track record, though it’s not significantly strong. A debt level of 95.8% of net worth leaves something to be desired in the balance sheet department.
The TSX index’s top potash miner, Nutrien’s 90-day returns of 17% outperformed the market as well as the Canadian chemicals industry; however, with negative one- and five-year past earnings-growth rates, there remains some danger here. That said, a debt level of 37.8% of net worth comes in under the moderate risk threshold, and valuation is fair with a P/B of 1.3 times book.
One of Canada’s premier food stocks, Saputo’s negative one-year earnings rate is ameliorated somewhat by a moderate five-year earnings-growth average of 9.5%. However, the risk-averse investor should note that its level of comparative debt at 46% of net worth means that its balance sheet could be better and may put off the long-range portfolio owner.
Year-on-year total shareholder returns (including dividends) of 7.9% may not be significantly high, though this figure exceeds both the Canadian food industry average as well as the TSX index for the same period. As such, this earns Saputo “outperforming” status, and may qualify it as a buy for some investors.
Compared to Rogers Sugar’s P/E of 15.2 times earnings and P/B of 1.8 times book, Saputo’s valuation is a little too overheated to be palatable at the moment from a P/E of 22.7 times earnings to a P/B of 3.2 times book that doubles the TSX index average.
Saputo pays a dividend yield of 1.48% and is looking at a 8.6% expected annual growth in earnings. However, compare his with Nutrien’s higher dividend yield of 3.2% and significant 36.5% expected annual growth in earnings, and it’s easy to see which is the more appetizing stock at the moment.
The bottom line
As we can see from the data, Saputo is a little overvalued; meanwhile, Rogers Sugar’s negative earnings outlook would be a point of concern for the long-term investor looking to add growth stocks to a portfolio. Nutrien continues to firm up as a desirable TSX index must-have in the meantime, with its sizable market share in the agri industry and its status as a crossover food and mining stock.
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 Victoria Hetherington has no position in any of the stocks mentioned. Nutrien and Saputo are recommendations of Stock Advisor Canada.