When talking about defensive stocks, investors will often think first of telecoms or utilities. Those are both great examples of defensive stocks, but there are other investments that are just as good, if not better. Grocery stocks in particular enjoy an impressive moat and benefit from providing necessary service.
Today, let’s take a moment to talk about Metro (TSX: MRU) and whether this is the grocery stock for your portfolio.
Metro and the moat
Grocery stocks have an impressive moat. I started off by comparing that moat to telecoms or utilities, but in reality, grocery stocks cast a much more impressive moat. Grocery stocks provide a necessary service to us: food. This outweighs the need for internet access that a telecom offers.
More importantly, there’s an emotional aspect to that moat. People derive a sense of satisfaction from buying groceries and instill their personal preferences into those purchases. In other words, we don’t just buy food based on what is most nutritious. We find something that is good for us and something that we like. You can’t get that level of satisfaction from paying your hydro bill, can you?
That perishable moat is a factor that prospective investors shouldn’t be dismissive of.
Metro is not the largest grocery stock on the market, but the company does boast an impressive network of stores. In total, the company has 950 grocery stores that are branded under several different names. Metro also enjoys a network of 650 pharmacies under the Jean Coutu brand. Both the grocery stores and pharmacies are concentrated in Ontario and Quebec.
Grocery stocks are innovating with the market
Remember that perishable moat that I mentioned above? Prior to the COVID-19 pandemic, that defensive moat also included the preference by many consumers to pick their own food rather than having someone else pick the food and deliver it to you. This provided grocers such as Metro some protection from the onslaught of mobile commerce.
Fast forward to today, and the pandemic has made online grocery shopping more accepted. The practice is no longer considered an emerging or niche market service. Instead, online grocery shopping has become another modern convenience, necessitated by the global health crisis. Also noteworthy is the point that grocery stores are deemed essential services. This might be why grocers have attracted investor attention recently.
What does this mean? In short, unlike most other retailers, Metro is not seeing a reduction in sales due to the pandemic. Instead, the company is posting much-improved results.
In the most recent quarterly update that was inclusive to July 4, Metro reported sales of $5,835.2 million, reflecting a solid 11.6% improvement over the same period last year. During the quarter, same-store sales saw growth across both the food and pharmacy segments of 15.6% and 1%, respectively.
Overall, Metro earned $263.5 million in the quarter, which came in 18.5% better than the same period last year. On a per-share basis, Metro earned $1.04 per diluted share, reflecting an impressive 20.9% increase over the prior year.
So far in 2020, Metro is up 16%. This pales in comparison to the overall market, which is still trying to dig out from the crash we saw earlier this year.
One more reason to pick up a grocery stock
If it isn’t evident by now, Metro is a great defensive stock. But there’s still one more reason to consider adding the stock to your portfolio: Metro provides investors with a quarterly dividend. At first glance, that 1.45% yield may not scream income producer. What it does offer is reliable income and growth that comes in the form of annual hikes.
In my opinion, Metro is a great addition to any portfolio.
