This Underrated Canadian Retail Stock Is a Great Value Pick

The best value pick at any given time is not the most undervalued stock in the market. Its growth potential and stability are two of the many factors investors should take into account.

| More on:
Hand of woman choosing or taking sweet products, snacks on shelves in convenience store

Image source: Getty Images

Whether or not you are purely a “value investor,” some undervalued stocks are difficult to pass on. Their allure comes from more than just the scope and magnitude of the undervaluation but also from the other strengths of the business. The strengths include a stable business model, strong financials, reputation, or the stock’s ability to reclaim its value soon, which makes it a powerful short-term investment.

Many perpetually underrated stocks almost always fly under the radar. But sometimes, a very well-known stock may find itself undermined and undervalued in favour of flashier options. Such a stock may prove to be a great value pick, and one Canadian retail stock currently fits the bill.

The company

The conglomerate that owns Sobeys, Empire Company (TSX:EMP.A) can be considered a compelling retail pick, even if we disregard the undervaluation. Sobeys is the crown jewel of the Empire company, but it has several other retail chains under its banners, which collectively make it one of the largest retail chain owners in Canada.

This includes 255 Sobeys stores, 350 fuel retail locations, 217 Foodland stores, and 194 IGA locations.

Grocery retail is the primary business of this conglomerate, but it’s also in the real estate business through a real estate investment trust (REIT) and a development company. The REIT primarily leases to Empire Company’s own locations, and this interdependence offers both parts of the business a bit more leash and resilience than either possessed on their own.

The stock

The stock is currently trading at a healthy 22% discount, which is one of the factors behind its modest undervaluation. Considering its 14-day Relative Strength Index is closer to the oversold levels than it’s to the overbought line, we can deduce that it’s undermined by the investors, making it a compelling discounted pick.

It’s also a compelling long-term holding as both a dividend and growth stock. The company offers a very modest yield of 1.8% even now, when it’s adequately discounted. But what it lacks in yield, it makes up for in the consistency and the financial stability of the dividends. It has raised its payouts for 28 consecutive years and is considered an Aristocrat, even by the stringent U.S. standards.

The growth has experienced some setbacks in the past decade. The stock fell by over 50% during the 2015-2016 bear market phase. It made a decent recovery, and despite this slump and a few smaller slumps since then, the 10-year stock growth is still at 49%.

Foolish takeaway

Empire Company can be considered a healthy and rewarding long-term holding. It’s also a resilient company. That’s partly because of its grocery- and food-oriented retail business and partly because of the diverse business model which covers different market segments.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

potted green plant grows up in arrow shape
Dividend Stocks

Best of Both Worlds: 3 Growth Stocks That Also Pay Dividends

Dividend stocks are great until a downturn ends. But luckily, these three dividend stocks also offer a massive amount of…

Read more »

Payday ringed on a calendar
Dividend Stocks

Monthly Passive Income: 2 Top TSX Dividend Stocks to Buy in June 2023

Here are two of the best TSX monthly dividend stocks you can buy in June 2023.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

RRSP Wealth: 2 Great Canadian Dividend Stocks to Buy in June 2023

Top TSX dividend stocks are now on sale.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

Retirees: 2 TSX Dividend Stocks That Reliably Pay You Cash

With strong underlying businesses, high-yielding dividends, and stable cash flows, these two TSX stocks can be excellent investments to consider.

Read more »

sad concerned deep in thought
Dividend Stocks

Better Buy for TFSA Passive Income: Telus Stock or TD Bank? 

Your passive income depends on the dividend yield you lock in. Telus and TD Bank are good investments, but which…

Read more »

Dividend Stocks

Turn a $10,000 Investment Into $844 in Cash Every Year

The power of compound interest from regular investments in quality dividend stocks can deliver solid long-term returns and make you…

Read more »

Dividend Stocks

Grab This 10.8% Dividend Yield Before It’s Gone!

This dividend stock is down 43% in the last year, and it's about to turn around in the near future.…

Read more »

grow dividends
Dividend Stocks

2 TSX Dividend Stocks With Seriously Huge Payouts 

If you are looking for dividend payouts of up to 7-11% of the stock price, now is the time, as…

Read more »