The TSX Composite Index has been bullish since the start of the year, surging 6% year to date. Then why would you be worried about a market downturn? Because the U.S. Federal Reserve has slowed interest rate hikes but not paused them. And unlike 2022, a 4.5-4.75% interest rate will continue throughout the year. Such high interest rates have already started affecting dividend stocks with high debt on their balance sheets.
Many investors have already overinvested in energy stocks and real estate and are looking for stocks that they feel safe keeping their money in. The stock market carries a significant risk, as it is the means through which investors invest in businesses. And no business happens without risk.
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Diversifying investment into a consumer staples stock
But there are some all-weather defence stocks that have low volatility across all market cycles. Consumer staples are one such segment, and Rogers Sugar (TSX:RSI) is a strong, defensive stock in staples. There are three things you should know before investing in consumer staples stocks:
- If you want an all-weather stock, you need to invest in companies whose products you buy in every situation. Consumer staples fit that bill. While the demand is stable, so is revenue. Hence, there is little scope for capital appreciation, but they outperform in a market downturn.
- While consumer staples are low-risk investments, they have a secular risk of a shift in consumer demand, like the change to vegan foods. Moreover, it is difficult to say if these stocks will remain competitive.
- Consumer staples rely on volumes, as they have to keep pricing competitive to avoid losing market share. Hence, a good way is to invest in consumer staples that are market leaders.
Rogers Sugar is Canada’s largest refined sugar supplier that refines, packages, and markets sugar products in Canada, the United States, and several European countries. And sugar hasn’t seen a demand shift for years. Last year was a one-off for Rogers Sugar, as it shipped an extra 5,000 metric tonnes of sugar due to rumoured operational issues at its competitor. Its operations are likely to return to normal growth in 2023. Moreover, the company plans to invest $160 million to expand production capacity by about 100,000 metric tonnes.
Rogers Sugar’s stock price momentum in a market downturn
Rogers Sugar stock is less volatile than the market with a beta of 0.57. Beta measures the volatility of a stock. The market has a beta of one, and a 0.57 beta signifies that if the market falls by 10%, Rogers Sugar’s stock price falls by 5.7%. This stable momentum was visible in the March 2020 market crash. While the TSX Composite Index fell 33.58%, Rogers Sugar stock fell 21%. Even in 2022, when the market index fell 16% between April and July 2022 due to aggressive interest rate hikes, the sugar stock fell 5%.
While the stock outperformed the market in a downturn, it underperformed in an upturn. The TSX Composite Index jumped 6.1% year to date, whereas the sugar stock surged only 1.43%. Hence, Rogers Sugar is not a good investment if you seek capital appreciation.
It is because sugar consumption is unlikely to grow by leaps and bounds, unless there is a global sugar shortage. Moreover, there are many other nations that offer sugar at a much cheaper rate. Rogers Sugar stock would likely trade within the $5-$6.5 range, unless there is a significant surge in sugar prices.
Why should one invest in Rogers Sugar?
While Rogers Sugar may not grow your invested money, it can keep it stable and earn you a 6.3% dividend yield. The company has been paying regular dividends since 2005 and slashed them twice in the last 12 years (6.25% in 2011 and 20% in 2015).
Rogers Sugar may not be a good long-term investment, but it is a good investment for the next three years, as the economy takes a recessionary hit and returns to growth. The stock is down 11.5% from its August 2022 peak. A $2,000 investment can earn you $126 in annual dividends for the next three years, while keeping your principal relatively steady.
