Inflation is still far higher than the central bank needs it to be. The Bank of Canada targets annual inflation at 2%, while the current inflation rate is 3.4%. That last percentage point is proving to be very sticky, which means interest rates might be higher for longer.
Higher interest rates create another issue — risk of an economic crisis. When businesses and consumers are struggling to pay back their loans, the economy enters a precarious position. A wave of consumer and corporate defaults could sweep across the nation in the months ahead. It could trigger a stock market crash.
To protect your wealth, stable companies with essential products and robust margins are probably the next bet. That’s why grocery store giant Loblaw Companies (TSX: L) should be on the top of your list.
Loblaw’s margins
Loblaw controls the largest grocery and pharmacy chains in Canada. The company holds a 28% market share in Canada’s grocery sector and a hefty chunk of the pharmacy sector, too. That dominant position allows the company to pass along rising costs to consumers and preserve its margins.
The typical Canadian grocery bill has jumped 21% over the past three years. The cost of food is up 8.9% over the past year alone. These rising costs have been passed along to customers at various Loblaw grocery chains, which is why the company’s gross margin has remained stable over the years.
Loblaw reported an adjusted gross profit percentage of 31.3% in its latest quarter. The margin was 31.1% in the same quarter last year. Simply put, the company saw no impact from inflation on its bottom line.
Sales and net income, however, were up alongside inflation. Loblaw reported total revenue growth of 6% year over year in its latest quarter, while net income was up 4.1% in the same period. The company is also hiking its dividend payout by 10% this year, rewarding shareholders for their patience.
These numbers highlight the fact that Loblaws has the ability to withstand inflationary pressures. The company could sustain its profits, even if the crisis persists for longer than expected.
Economic crisis
Loblaw might also be resistant to an economic crisis. If Canada enters a deep and prolonged recession, Loblaw may have to discount some of its non-essential items. However, there’s little incentive to shift the price of essentials like medicines, eggs, and rice.
Essential businesses like grocery chains and pharmacies tend to outperform during recessions. That’s what makes this stock an ideal target for conservative investors looking to safeguard their wealth.
Bottom line
Investors should be watching all the looming economic risks closely. The Bank of Canada is worried about inflation rebounding or staying above target for too long. Meanwhile, higher interest rates could dip some corporations and consumers into default. If we enter a recession, investors need to protect their wealth in stable companies like Loblaw.
