2022 Crisis: Time to Hold Basic Needs Stocks

Income investors can overcome or lessen inflationary pressures in 2022 by moving to basic needs stocks.

When COVID-19 broke out in March 2020, the impact was catastrophic. Because the deadly coronavirus was spreading fast through social interaction, governments had to close borders and impose travel bans. Businesses and sectors that were compromised had to lay off thousands of workers.

Canada moved swiftly to keep the economy afloat. Emergency programs, mostly financial, were introduced so people would have lifelines to endure the pandemic. Household savings grew because Canadians spent on essentials or basic necessities.

The pandemic is still around in 2022, although health officials have contained the virus, including the Omicron variant. However, rising inflation is top concern today. According to the Bank of Canada, the rate will remain elevated longer than expected. Expect inflation to erode the purchasing power of consumers.

Possible crisis

Billionaires are worried, too, about a possible crisis this year after the pandemic. Microsoft founder Bill Gates, for example, is rebalancing his portfolio in anticipation of a new crisis unfolding. Reports say Gates is moving to sectors relating to human needs.

If you want to follow Gates’s lead, load up on shares of Loblaw (TSX: L), Metro (TSX: MRU), or North West Company (TSX: NWC). The respective businesses should endure, because they sell basic needs and essentials. Their dividends and payouts should remain healthy and uninterrupted.

Not extreme but manifesting

Loblaw already feels that customers are becoming price sensitive and tempering their purchases. Executive Chairman and President Galen Weston expects inflationary pressure to continue over the next couple of months. He said, “It’s not as extreme as you might expect it to be, but it is there and it is manifesting itself most explicitly in the growth of discount.”  

The unaudited Q4 fiscal 2021 results (quarter ended January 31, 2021) showed a 2.8% and 30.1% increase in revenues and adjusted net earnings versus Q4 fiscal 2020. Weston said, “With a clear strategic agenda, we remain confident in our ability to create value over the long term.” At $98.87 per share, Loblaw pays a 1.45% dividend.

Inflationary pressures

Metro’s president and CEO Eric La Flèche said, “Our industry is facing higher than normal inflationary pressures.” Nevertheless, the $15.88 billion company delivered strong results in Q1 fiscal 2022 (quarter ended December 18, 2021). Total sales grew 0.9% versus Q1 fiscal 2021, while adjusted net earnings rose 8.3%.

Notably, pharmacy same-store sales went up 7.7% year over year and up 9.1% versus Q1 fiscal 2020. While Metro pays a modest 1.64% dividend ($66.16 per share), it’s a Dividend Aristocrat. The consumer-defensive stock has a dividend-growth streak of 27 consecutive years. Management announced a 10% dividend hike after the quarter.

Captured markets

North West Company is very small compared to Loblaw and Metro but pays a higher dividend (4.01%). At 36.02 per share, current investors enjoy a 5.2% year-to-date gain in addition to the generous yield. It’s worth knowing that NWC has returned 63,194.22% (22.77% CAGR) in the last 31.44 years.

The $1.73 billion company is a food retailer and provider of everyday products. Its captured markets are in far-flung, hard-to-reach rural communities and urban neighborhoods in Canada, Alaska, the South Pacific, and the Caribbean.

Inflation protectors

Basic needs stocks are inflation protectors. Risk-averse income investors have three excellent choices on the TSX today.  

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Microsoft and THE NORTH WEST COMPANY INC.

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