Loblaw Companies (TSX:L) stock rose 5% in August — an impressive feat considering the S&P/TSX Composite Index rose by less than 2%. While a 5% monthly return doesn’t seem that impressive, it works out to an annualized return of more than 60%. Loblaw stock is simply on fire. It’s beaten the market over the past one-year, five-year, and 10-year periods.
Why did the stock’s success continue last month? Do you still have time to cash in?
Here’s what happened
As Fool contributor Amy Legate-Wolfe wrote in May, grocery stocks are often the most consistent performers on the market. According to Legate-Wolfe, Loblaw “has managed to reach every type of consumer and collect data on how to make them loyal to the Loblaw brand, whichever one that may be.” This has created a reliable base of consumers for what is already a recession-resistant business.
In July, Loblaw proved its resiliency during its second-quarter earnings call. The company posted GAAP EPS of $0.77 from $11.1 billion in revenue. Sales were up 3% year over year. Results were a bit below consensus, but investors got a confidence boost after management revealed it used part of its $333 million in quarterly free cash flow to complete a $250 million share buyback.
Throughout August, few newsworthy events occurred. The upward price movement simply reflected growing optimism around the company’s efficiency and data efforts, not to mention renewed interest in companies that can weather a potential economic storm. As the largest grocery store chain in Canada, Loblaw is far from a high-growth company. Over the last three years, sales have grown by just 1% per year. Scale in the grocery industry, however, is hugely beneficial to the bottom line. Over the same period, net income grew by nearly 10% annually.
What to expect
Next year, analysts expect sales to grow by 1% or less. EBITDA is expected to grow by roughly 6.5% due to the aforementioned cost optimization and data efforts. Other than that, there isn’t much to this story. August was a quiet month, and investors shouldn’t expect any material news until the next quarterly results. At this point, Loblaw’s strategy is simply to defend its market share, drive cost efficiencies, and return capital to shareholders. That’s it.
While you may be turned off by this unexceptional story, those worried about a market downturn (especially retirees) should strongly consider shares. Loblaw’s business model is the definition of recession resistant. Consumers will continue to purchase groceries no matter how hard the economy is hit. In fact, economic troubles could help Loblaw over the long term. Competitors may find it difficult to access capital or grow, allowing Loblaw to use its scale to reinforce its market share and capitalize on industry woes.
Consider the 2008 financial crisis. Loblaw stock was barely impacted, and over the following decade, posted an impressive stretch of revenue and profit increases. The dividend currently stands at a paltry 1.6%, but, when combined with the company’s massive share buybacks, the total return to shareholders exceeds 7%. That rate of return isn’t going to break the bank, but it’ll lead the market if a bear market hits.
