It is an important exercise to periodically review the performance of our stock holdings as well as those stocks that are on our watch lists. This review should happen at least once a year but also when we notice big stock price movements.
Let’s review Loblaw Companies’s (TSX: L) stock price.
Loblaw benefits from defensive, risk-averse sentiment as coronavirus fears spark stock market crash
Loblaw’s stock price fell only slightly in February, and while this may seem unimpressive at first glance, when we consider the fact that this was a month that saw the S&P/TSX Composite Index beaten down significantly, it becomes clear that Loblaw stock is shining. In fact, markets globally were down significantly as well, highlighting the fact that Loblaw stock is an attractive one for preservation of capital, which is a very appealing quality these days.
So, fears of a spreading coronavirus and its impact on demand and the health of global economies have clearly had a toll on markets. And that’s not even mentioning general fears for our health regardless of financial markets, all of which can easily shift investor sentiment down a slippery slope of negativity.
From Loblaw’s exposure to the consumer staples sector to its exposure to the healthcare business, Loblaw stock is set up nicely to ride the storms of uncertainty and economic hardship. Loblaw stock is therefore a leading defensive Canadian stock to own.
Loblaw’s stock price is supported by strong financial results
February saw the release of Loblaw’s fourth-quarter and year-end 2019 results. Despite the fact that the results were slightly worse than expected, it is clear that the company is setting itself up to benefit from its leading market position in the discount grocery segment; with banners such as No Frills and Maxi fending off competition from the likes of Walmart. Furthermore, Loblaw’s strong private label brands and leading market share in prescriptions and front-of-store sales at Shoppers Drug Mart all work to solidify the company’s value proposition and its free cash flow generation.
So, while the latest quarter was slightly disappointing, Loblaw still generated free cash flow of approximately $1.2 billion, with a significant portion of that being used to return capital to shareholders by buying back 13.6 million shares (3.6% of shares outstanding as of December 2018). And we can expect free cash flow in excess of $1 billion annually going forward, as the company’s predictable and defensive business continues to provide consumers with essential everyday products.
Foolish bottom line
Loblaw stock has held up exceptionally well in this difficult environment, as we would expect. Going forward, we can feel confident that Loblaw should continue to be a safe bet for our investment portfolios, as the company continues to dominate the food retail and pharmacy landscape here in Canada.
In closing, I would like to remind Foolish investors of our belief in holding great businesses for the long term. While this belief remains intact, we are also aware that sometimes, short-term stock price movements create opportunities to create wealth. By blending this long-term focus with a keen eye for short-term stock mispricings, we can use both strategies in harmony, and our quest for financial freedom can be fulfilled.
