The top Canadian food stocks are defensive ideas in an uncertain market. Particularly, some economists believe we will experience a recession by next year. These undervalued stocks appear to be on sale.
Saputo
Saputo (TSX: SAP) is a packaged foods company in the consumer staples sector. Specifically, it produces, markets, and distributes a range of dairy products, such as cheese, milk, extended shelf-life milk, cream products, cultured products, and dairy ingredients.
The consumer staples stock is out of favour — down about 16% year to date. At $28.16 per share at writing, Saputo stock trades at about 15.6 times its blended adjusted earnings. Some headwinds it’s experiencing include higher inflationary pressures and softer demand in the United States.
The Canadian Dividend Aristocrat dividend growth has slowed to a halt — it has maintained the same quarterly dividend for eight consecutive quarters. Its five-year dividend-growth rate is 3.0%. Currently, it yields close to 2.6%.
Its trailing-12-month dividends were covered by earnings and free cash flow. And it has a treasure chest of retained earnings that could serve as a buffer for the dividend. The analyst consensus 12-month price target represents a discount of approximately 23% or near-term upside potential of over 30%. So, it could be a good turnaround investment.
SAP and MFI Total Return Level data by YCharts
Maple Leaf Foods
Maple Leaf Foods (TSX: MFI) is also a packaged foods company in the consumer staples sector. However, it has held up much better and, in fact, is 6% higher year to date. Additionally, in the last 10 years, it has been a better investment than Saputo, as shown in the graph above, which illustrates how an initial investment of $10,000 has grown.
Maple Leaf makes food products under an umbrella of brands, including Maple Leaf, Maple Leaf Prime, Maple Leaf Natural Selections, Schneiders, Mina, Greenfield Natural Meat Co., Lightlife, Field Roast, and Swift.
The Canadian Dividend Aristocrat last hiked its dividend by 5%, but its five-year dividend-growth rate is 12.7%. At $25.96 per share at writing, the dividend stock yields 3.2%. It has retained earnings that could serve as a buffer for its dividend. The analyst consensus 12-month price target represents a discount of approximately 21% or near-term upside potential of 27%.
Empire
Empire Company (TSX: EMP.A) is a more defensive food stock than the other two. It is in the food retailing business, operating under banners, such as Sobeys, Safeway, Foodland, FreshCo, and IGA. Grocery stores are a low-margin, high-volume business. However, it currently has a lower margin than its peers — Loblaw and Metro.
So, Empire has the potential to expand margins by expanding its core business and accelerating e-commerce under Project Horizon — a three-year strategic plan that began in the first quarter of fiscal 2021.
Naturally, it also trades at a discount to its peers. At $36.29 per share at writing, the analyst consensus 12-month price target represents a discount of about 12%, or near-term upside potential of almost 14%. It also offers a dividend yield of 2%. Its payout ratio is estimated to be sustainable at about 24% of adjusted earnings.
The Canadian Dividend Aristocrat has increased its dividend for about 28 consecutive years with a 15-year dividend-growth rate of 7.6%. For your reference, its most recent dividend hike was 10.6% last month.
