Grocery inflation finally delivered a number Canadians could read without immediately putting something back on the shelf. Food purchased from stores rose 1.7% year over year in September, the smallest increase since May 2024, according to Statistics Canada.
That doesn’t mean the grocery bill fell. It means prices rose more slowly than they had been rising. The distinction is less satisfying than a cheaper checkout total, but it helps explain why a lower inflation reading doesn’t automatically mean trouble for a grocer’s profits.
A retailer can grow through customer traffic, new locations, product mix, and services even when price increases cool. Investors should look for those sources of growth before assuming that a company needs permanently painful food inflation to keep shareholders happy.
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Business behind the basket
Loblaw Companies (TSX: L) operates food stores and a large pharmacy business. Its discount banners give price-conscious customers places to shop within the same group, while prescriptions and other health-related purchases provide revenue outside the weekly grocery run.
That mix is useful when households become more selective. Customers may trade down or change what goes into the basket without disappearing altogether. Competition still determines how much of their spending translates into profit, so a familiar store name isn’t protection against every retail challenge.
Loblaw’s second-quarter food retail same-store sales increased 1.6%. Adjusted diluted EPS rose 11.9% to $0.66. Those figures suggest that earnings growth involved more than simply opening new stores, although adjusted results require the usual comparison with the reported accounts.
Smaller yield
The latest quarterly dividend was $0.16 per common share. Annualized, that is $0.62. At the recent closing price of $68.72, the yield is roughly 0.9%.
The quarterly dividend equals about 23.5% of the latest quarter’s adjusted EPS. That simple payout comparison leaves room for reinvestment and future increases if earnings hold up. Though it isn’t a promise that the board will distribute all of the remaining profit.
For investors building dividend income, Loblaw is more naturally a dividend-growth candidate than a high-yield holding. Buying it for immediate cash alone would overlook both the small starting payout and the price being paid for the underlying earnings.
Considerations
At $68.72, the stock costs about 26 times earnings. That’s an annualized-quarter calculation, not a trailing or forward multiple. It still illustrates that investors are paying a substantial price for the company’s consistency and expected growth.
Competition could squeeze margins, wages and operating costs could climb, and a slower consumer economy could affect higher-margin purchases. Regulators and public scrutiny can also influence the way a major grocer operates. Essential products don’t exempt shareholders from valuation risk.
I like Loblaw as a business to research for a diversified Canadian stock portfolio, especially when the goal includes compounding over several years. I would be less enthusiastic about paying any price simply because grocery spending looks dependable.
Bottom line
For comparison, a hypothetical 4% income investment would generate about $400 annually on $10,000, before tax and any price change. Loblaw’s roughly $90 makes the trade-off clear. A buyer is accepting less cash today in exchange for expected growth. That can work well over a long holding period, but it is a poor match for someone who needs several hundred dollars of immediate annual income.
The next test is whether customer traffic and pharmacy activity can support earnings while food inflation cools. Continued growth would give the board more room to raise a modest dividend. That would offer shareholders something more durable than hoping the next grocery receipt gets larger.
