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Which Grocer Belongs in Your Portfolio?

Grocers are interesting, and often misunderstood investments. The reason I say that is because grocers provide us with an essential product we need to survive, yet unlike when we pay our utility or telecom bill, we actually take some joy in buying and preparing food for our families.

Metro (TSX:MRU) and Loblaw (TSX:L) are two of the largest grocers in the nation, both with a massive network of stores backed up with an equally impressive network of pharmacies. But which of these two belongs in your portfolio? Let’s make a case for both.

The case for Metro

Metro’s store network spans across Ontario and Quebec, operating over 600 food stores across several leading brand names such as Metro, Super C, and Food Basics.  Turning to Metro’s pharmacy segment, the company operates over 650 stores under the Jean Coutu, Burnet, and Drug Basics brands.

The move into the lucrative pharmacy segment is one that has been replicated by Metro’s peers, including Loblaw over the years, and in doing so Metro has been able to unlock opportunities for growth and synergies.

In terms of results, in the most recent quarter, Metro announced results for the first fiscal of 2019 that were in a word, impressive. Sales of $3,977.7 million topped the same quarter last year by an incredible 27.7%, with much of that growth being attributed to the addition of the Jean Coutu pharmacy.

Adding to those results was the handsome 11.1% hike to the quarterly dividend that was announced earlier this year that pushed Metro’s dividend to a respectable 1.63%.

To combat the rising tide of mobile commerce, Metro has been gradually rolling out a delivery service to its customers, and the company also acquired a meal-prep company a few years ago that could be an appealing option for younger, busier families that don’t have time to shop for or prep their meals.

The case for Loblaw

Loblaw is by far the larger grocer, but the company’s size is not the most alluring aspect of this behemoth; that honour is reserved for Loblaw’s inroads to Canada’s cannabis sector.

Following legalization last year, Loblaw is now licensed to sell cannabis in Newfoundland and Labrador. Adding to this is the fact that the company’s Shoppers Drug Mart pharmacy, which was granted a license to sell medicinal marijuana last year, signed a supply agreement earlier this month which will allow the pharmacy to begin selling online.

Looking beyond the growing impact of the new cannabis segment, Loblaw also benefits from many of the synergies that Metro has, such as having a large (and in the case of Shoppers, a much larger) network of pharmacies across the country. The one differentiator here is that Shoppers and Loblaw were joined several years ago, meaning that synergy-specific gains, as well as a boost brought on through cross-selling merchandise, have already been largely realized.

Apart from the investment into the cannabis sector, Loblaw’s new rewards program, which carries a hefty $99 annual fee and a slew of benefits is proving wildly successful. The PC Insiders program offers subscribers free online grocery shopping pick up as well as free shopping across several of the company’s brands. Sweetening the deal is a slew of rewards, points opportunities as well as a welcome basket.

In terms of a dividend, Loblaw offers a quarterly distribution with a 1.78% yield.

Which is the better investment?

While both companies offer compelling investment options, at this time Loblaw is in my opinion, the better investment. Loblaw’s inroads into the emerging cannabis segment have raised the eyebrows of investors everywhere, and the overly positive response to Loblaw’s new fee-based rewards program should help drive revenues higher over the long run.

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Fool contributor Demetris Afxentiou has no position in any of the stocks mentioned.

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