It may not be a great time to buy items at the grocery store. Yet if you’re invested in Loblaw Companies (TSX: L), it could be exactly the right time. Shares of Loblaw stock continue to remain high as stubbornly high grocery prices push past even high inflation. While it’s certainly not making friends at the checkout counters, investors would disagree.
But what about longer-term investors? Is there reason to fear a drop? Today, let’s take a look and see.
Just keeps climbing
Loblaw stock has remained resilient in terms of seeing elevated grocery prices. Yet if you think it’s as easy as blaming the store itself, think again. Loblaw stock has firmly stated that suppliers are the ones who have raised prices by more than $1 billion so far in 2023, according to Loblaw management.
The company stated that these higher prices were “not justifiable,” and as they lower, which they should, prices will drop as well. Prices for transportation, wheat, flour, and paper have already come down; therefore, Loblaw stock continues to push for a decrease in its items as well.
This comes as the grocery store and other grocery chains have faced severe criticism by the public. Grocery prices continue to resist the trend of lowering costs, according to Statistics Canada. While inflation rose 2.8% in June, for example, grocery was up by 9.1% in the same time.
Yet earnings remain stable
The issue that consumers may have is that Loblaw stock has raised prices to continue meeting its earnings guidance. Revenue came in 6.9% higher than the second quarter last year at $13.7 billion. However, the largest growth came from their discount locations, such as No Frills and Maxi.
To help with this demand, Loblaw stock stated it would open 25 more No Frills locations this year alone. Furthermore, this will help customers continue to use the PC Optimum program, which has seen a surge in use as customers look for ways to save.
Yet while profits and revenue are up, the company has stated that sales have fallen. The company has therefore done its best, it says, to not pass on the increases in prices to customers as much as possible.
Where does that leave today’s investor?
The bottom line here is that Loblaw stock is the largest grocery chain in Canada. Even when we’re in an economic downturn, consumers just go to the lower-cost retailers. This has helped the company remain stable overall. And that will continue to happen as we experience this volatile economy.
This also means that Loblaw stock will be able to turn things around quite quickly. We’ve already seen this happen during the pandemic, with government aid and essential services providing quick recovery. It’s this stability that’s left investors happy with the stock, with shares up 2% in the last year and 13% since 52-week lows.
As Loblaw stock continues to trade at a fair 19.36 times earnings and has a dividend yield of 1.49% as of writing, it’s certainly one to consider — especially if you’re thinking long term. With more No Frills lined up, an easy path to recovery, and the potential for higher sales as prices come down, Loblaw stock does look like a solid buy this September.
