Image source: Getty Images
There are different kinds of retailers. Some retail businesses are more predictable than others. Are you looking for stability? Then consider defensive grocery store stocks like Loblaw (TSX: L) and Metro (TSX: MRU). They typically trade at premium valuations because of their stability. These retailers should be resilient in recessions, because people tend to eat more often at home during gloomy economic times.
These two Canadian retail stocks had a nice run-up last year, primarily because of high inflation that helped boost profits. They experienced stock price gains of 11% to 16%, respectively, versus the Canadian stock market proxy’s price decline of 9%, as shown in the graph below.
Loblaw, Metro, and XIU data by YCharts
Specifically, in 2022, Loblaw saw a 6.3% revenue increase to $56.5 billion, and its gross profits rose 7.4% to almost $18 billion, while its operating expense rose 6.1% to $14.6 billion. Ultimately, its diluted earnings per share (EPS) climbed 5.5% to $5.75. However, its adjusted EPS climbed 22%, which better aligns with its total returns of about 17% for the year.
Valuation wise, analysts believe Loblaw stock trades at a discount of about 17%. The stock also yields 1.4% to provide a base return, as the payout ratio is sustainable at about 23%. It’s set up to increase its dividend in May. At about $116 per share, it trades at a fair price-to-earnings (P/E) ratio of about 16.6 versus its long-term normal P/E of about 16.7.
Last fiscal year, Metro raised revenues by 3.3% to $18.9 billion, and its gross profits rose 3.5% to almost $3.8 billion, while its operating expense climbed 2.8% to $2.5 billion. Ultimately, its diluted EPS increased by 5.4% to $3.51. However, its adjusted EPS climbed 11%, which aligned with its total returns of about 13% for the year.
Analysts believe Metro stock trades at a discount of about 10%. The stock also yields 1.7%, after hiking its dividend by 9.8% in January. Its payout ratio is expected to be sustainable at about 28% this year. At below $70 per share, it trades at a fair P/E of about 17.4 versus its long-term normal P/E of about 16.9.
Another retail stock that you might look into is one like Canadian Tire (TSX: CTC.A). Because it sells a chunk of durable goods, it tends to do poorly during recessions, at which time it may be good to accumulate shares on the cheap. For example, during the pandemic recession, the stock fell more than 40% from peak to trough. However, in a year, it managed to double investors’ money from the pandemic market bottom.
At about $164 per share, the dividend stock trades at a forward P/E of about 9.4. This is a discount of about 25% from its long-term normal valuation. It offers a higher dividend yield of 4.2%, which is sustainable on an expected payout ratio of about 40% this year.
On one hand, Canadian Tire may do badly in a recession. On the other hand, it could make a big comeback in an economic expansion phase post-recession.
