When you think of grocery store stocks, “exciting” is probably not the first word that comes to mind. Yet, Loblaw (TSX: L) has proven that it can shatter that stereotype. With an impressive year-to-date return of approximately 39%, the food retail stock has outperformed the Toronto Stock Exchange (TSX), which has risen about 18% so far this year.
These figures are remarkable, especially when compared to the Canadian stock market’s total return at a compound annual growth rate (CAGR) of 9.2% over the past decade. So, what’s driving this surge, and is Loblaw stock still a wise investment?
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The inflation effect: A boost for grocery giants
One major factor behind Loblaw’s impressive performance is the impact of rising inflation. As the cost of living increases, consumers are more inclined to shop at established grocery chains, where they feel they can get value for their money.
Loblaw’s portfolio, which includes well-known brands like Real Canadian Superstore, Shoppers Drug Mart, No Frills, Extra Foods, Valu-mart, and T&T Supermarket, positions it well to benefit from these trends. Higher prices in food and general merchandise have contributed significantly to the company’s growth.
Moreover, grocery stores tend to be resilient during economic downturns, as people still need to eat, making Loblaw a defensive play. In times of economic uncertainty, families often choose to cook at home rather than dine out, further bolstering grocery sales. This trend is likely to continue, making Loblaw an attractive option for both conservative investors and those looking for stability in their diversified portfolios.
Strong financial performance: A decade of growth
Loblaw has consistently demonstrated solid financial performance over the years. Over the past decade, while revenue per share growth has been modest, with a CAGR of 5%, the company has successfully expanded its operating income per share at a CAGR of 10.6%. Even more impressive, its diluted earnings per share have grown at a CAGR of 11.4%. This strong growth trajectory is a testament to Loblaw’s operational efficiency and its ability to adapt to market changes.
Additionally, Loblaw has maintained a steady dividend growth rate, with a CAGR of 6.4% over the same period. The defensive name maintains a low and sustainable payout ratio, which is estimated to be about 23% of diluted earnings this year.
A historical total return at a CAGR of 16.4% that outpaced the Canadian stock market’s 9.2% suggests Loblaw stock could be a reliable investment option.
Is Loblaw still a buy?
As of the recent stock price of $173.84 per share, Loblaw stock appears fully valued, with a price-to-earnings ratio of approximately 20.8 — essentially the highest multiple in the company’s history over the past two decades. However, Loblaw’s robust earnings growth is projected to continue at a minimum of 10% annually over the next few years, which could justify this elevated valuation. Analysts seem to agree, as they have set a 12-month consensus price target that suggests a 5% upside, indicating that the stock is fairly valued at present.
Given Loblaw’s defensive business model and the increasing need for groceries, it could serve as a solid holding for any diversified portfolio. While the stock valuation may seem full, history shows that outperformers often maintain their momentum. For current shareholders, holding onto your shares may be wise, while potential buyers might be prudent to wait for market pullbacks or consolidations to snag a more favourable entry point.
No matter what, Loblaw’s impressive track record and stable growth prospects make it a stock worth keeping an eye on in the coming months.
