Investors have been switching to relatively defensive stocks from growth ones amid fears of a further selloff. One name that notably stands out when it comes to defensives is a Canadian food and pharma retailer Metro (TSX:MRU). Metro stock had been notably strong in the last month when the broader markets witnessed one of the most brutal selloffs ever. It soared almost 3%, while the TSX Composite tumbled more than 30% since February 19, 2020.
Metro: A solid defensive play
In my view, Metro stock could be a classic defensive play here and could continue to outperform broader markets amid this selloff. Even if shoppers stay home, and lower demand could hamper Metro’s financial performance in one or two quarters, it remains a strong investment proposition for the long term.
With a network of around 1,600 food and pharmacy stores across Quebec and Ontario, Metro offers basic necessities that will hardly be out of demand. It was reasonably well placed in earlier turbulent times as well. Notably, Metro didn’t just continue to pay dividends but also increased its payouts during the 2008 financial crisis.
That’s mainly because it’s top line and earnings growth remained intact even in 2008 and 2009. I agree that the current situation driven by COVID-19 jitters is much different in many aspects compared to 2008. However, its healthy combination of food and drugs will likely bode well for its earnings stability in the short as well as in the long run. The company will likely keep on generating steady cash flows and thus pay stable dividends in the foreseeable future.
Metro has a policy of paying 30-40% of its profits in the form of dividends to its shareholders. Thus, in 2020, the company is expected to pay a dividend of $0.90 per share, indicating an annualized yield of 1.6%. Its stable earnings and cash flows allow the company to pay steady dividends.
Metro increased its dividends by more than 12% this year compared to 2019. It has been raising dividends regularly for the last several years. That’s not possible if the management is not confident about its future earnings growth. In the last five years, Metro increased its per-share dividends by 15% compounded annually.
Metro stock: Valuation
While Metro stock has remained strong amid the recent carnage, interestingly, it does not look stretched in terms of valuation. It is trading at a forward price-to-earnings multiple of 18 times, close to its five-year historical average. Thus, it indicates that the stock has more room for further growth going forward. Metro’s peers Dollarama and Loblaw are trading close to 18 times and 15 times, respectively. However, both these peer stocks were weak in the recent downtrend, and Metro significantly outperformed them.
Broader markets could continue to trade weak in the short to medium term. Investors should not perceive periodic surges as signs of recovery. In such times, defensive or non-cyclical stocks that pay regular dividends such as Metro could offer an attractive investment proposition. Even if one or two quarters are weak for Metro, the stock looks poised for stable long-term growth.
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Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.