The economy has demonstrated more resilience so far in 2023 than many expected. However, with an elevated interest rate environment and macro uncertainty, it’s prudent to allocate a portion of the portfolio toward defensive and low-volatility stocks. While the TSX has several low-volatility and defensive stocks, I’ll focus on food and drug retailers like Loblaw (TSX: L) and Metro (TSX: MRU).
Both these retailers are known for delivering decent capital gains and adding stability to your portfolio. Regardless of the economic situation, Loblaw and Metro have been steadily growing their top- and bottom-line revenues and earnings. Further, as they sell everyday essentials, their businesses are less cyclical and perform well even amid a weak macro environment. Moreover, thanks to their growing earnings base, both these companies consistently return cash to their shareholders through dividend payments and share buybacks.
As both these companies remain fundamentally strong, let’s examine which of these large-cap stocks could deliver higher returns.
Why is Loblaw a solid defensive stock?
Loblaw is Canada’s leading food and pharmacy retailer. It provides groceries, clothing, health and beauty products, and general merchandise. It also offers pharmacy and healthcare services, wireless mobile products, and financial services.
Its wide range of product offerings, significant presence across Canada with over 2,400 stores, and focus on value pricing make it a go-to destination for Canadians, driving its traffic in all economic situations. Loblaw’s discount stores continue to perform well, driven by solid demand for private-label brands. Further, its inflation-fighting price freeze, ease of shopping (through in-store shopping and pick-up and delivery), and focus on reducing delivery speed augurs well for future growth by driving its market share.
Overall, Loblaw’s large scale, focus on offering value and reducing operating costs, and strategic procurement are expected to drive its top and bottom lines. Moreover, its investments to optimize the retail network and modernization and automation of its supply chain are likely to support its growth.
Thanks to the continued strength in its retail and pharmacy sales and a growing earnings base, Loblaw is expected to enhance its shareholders’ returns through share repurchases and dividend hikes. Further, Loblaw stock is trading at a forward price-to-earnings multiple of 13.9, which is lower than the historical average. Meanwhile, it offers a reliable dividend yield of over 1.6% (based on its closing price of $110.96 on October 24).
Why is Metro an attractive stock?
Like Loblaw, Metro is also a leading food and drug retailer in Canada. The company focuses on offering convenience, competitive pricing, and ease of shopping through its omnichannel platform. Thanks to this, Metro consistently drives traffic drive and its performance.
Metro’s extensive private-label product base allows it to offer competitive prices. Moreover, its efficient promotions and loyalty programs support its growth. The retailer is also investing in its food and pharmacy networks, growing its footprint, and modernizing its distribution network. All of these measures are expected to support its future growth. Further, it is expanding its e-commerce business and in-store pick-up services and leveraging technology like self-serve checkouts to drive efficiency.
Overall, Metro is focusing on increasing its market share in the food sector, which makes it a reliable bet in all market conditions. At the same time, the company is modernizing its supply chain network and accelerating the digital transformation initiatives that will support its growth. The retailer has increased its dividend for 28 consecutive years and offers a yield of 1.58%. Further, it is trading at a forward price-to-earnings multiple of 15.6, which is lower than the historical average.
Bottom line
Both Loblaw and Metro are attractive defensive stocks. However, Loblaw stock has consistently outperformed Metro with its returns. Further, Loblaw’s large scale and relatively lower valuation makes it a more compelling bet near the current levels.
