Canadian Grocery Store Analysis

In today's market, many people in North America are faced with the realization that a market isn’t as strong as it may seem. With the housing market issues in Canada and the Fed toying with the interest rate in the United States times are somewhat unstable. So in times like these strong companies that we need regardless generally perform steadily and act as somewhat of insurance to your portfolio when some of your more risky equities may drop in the short term. One such group of companies that perform well are typically the grocery stores.

 

In this article I will take a look at three big grocery stores in Canada.

•         Loblaws
•         Metro
•      Empire

These three companies supply food to most Canadians and are a vital service making them steady gaining investments, The question is however, is how do they fit in a dividend portfolio and how expensive is it to have a “safe” equity such as this in your portfolio.

 

1.      Price to Earnings Ratio

 

Price to Earnings Ratio (TTM)
L	MRU	EMP
337.8	18.4	22.7
Forward Price to Earnings Ratio
L	MRU	EMP
15.90	15.50	13.30

From the above numbers it can be seen that all three companies fairly priced with Loblaws being the most expensive. However the TSX on average has about a P/E average of around 17 so on a TTM look they seem expensive, however, on a forward P/E ratio they are below the average. From the P/E ratio you can’t get a good picture of these companies and in general a P/E ratio is not the best metric to analyze stocks however, it should be looked at.

 

2.      Dividend

 

Dividend Yield
L	MRU	EMP
1.54%	1.27%	1.20%
Dividend Growth Rate
L	MRU	EMP
3.20%	14.70%	7.40%

 

From the dividend analysis we see several important things that will be highlighted. First off out of the three L has the highest yield at 1.54%! All three companies in my opinion are yielding far too low for a dividend investor. I tend to want to invest in companies that maintain a dividend of over 3% unless they stock has a great growth profile and I believe the company will grow to one day meet my 3% standard.

 

Dividend growth was looked at to determine if the yields are in line to grow. From those metrics the MRU and EMP seem to be growing their dividends nicely while L is growing at a much slower rate.

 

3.      Payout Ratio

 

Payout Ratio (2015)
L	MRU	EMP
68%	93%	19.80%

 

From the payout ratio we see that EMP is the only company that can really afford to increase their dividend by much. MRU which has the highest dividend growth rate is almost paying out 100% of its earnings, meaning the company has little room to grow. L also has a high payout ratio, I consider anything over 60% too high to give a company good growth.

 

From the above metrics, I can easily say that the Canadian Grocery store are fairly expensive, they have poor yields and with the exception of EMP the payout ratios are to high to enable the companies to grow the way I would like.

 

I do not believe I will take a position in either of these companies until the yields improve of the price/earnings drops drastically.