With the macro uncertainty, it’s prudent to include a few top-quality defensive and low-volatility stocks in your portfolio for stability and decent growth. While the Canadian stock exchange has several low-volatility stocks, I’ll restrict myself to food and drug retailers like Loblaw (TSX:L) and Metro (TSX:MRU).
Both these companies look attractive and have been steadily growing their revenues and earnings, regardless of market conditions. Notably, these companies sell essentials like food and drug, which is why they are less cyclical and deliver strong financials, even in an economic downturn. Moreover, they continue to enhance their shareholders’ returns through dividends and share buybacks.
As the fundamentals of both these companies look similar, let’s examine which of these large-cap stocks could deliver higher returns.
Why is Loblaw an attractive stock?
Loblaw is Canada’s largest food and pharmacy retailer. The company offers grocery, apparel, personal care products, and other general merchandise. The retailer’s large scale, presence across 2,400 locations, wide range of products, and focus on value pricing augurs well for growth and make it a reliable stock for all economic situations.
Loblaw’s discount stores continue to perform well due to the value pricing. Meanwhile, its inflation-fighting price freeze, attractive loyalty rewards program, ease of shopping, and growing penetration of private-label food products continue to drive traffic and its financial performance.
Overall, Loblaw’s retail excellence, strategic procurement, and investments in growth initiatives like optimizing its retail network, enhancing and integrating its Digital Retail platforms, the modernization and automation of its supply chain, and its Connected Healthcare strategy augur well for future growth.
The company’s retail business will likely grow steadily, delivering solid earnings and allowing the company to return cash to its shareholders. Its forward price-to-earnings multiple of 14.8 is lower than the historical average. Meanwhile, it offers a reliable yield of over 1.5%.
Metro stock is a solid defensive play
Metro is more like a smaller version of Loblaw with a lower number of food and drugstores. Its focus on convenience, competitive pricing, and omnichannel offerings continues to drive traffic and its performance.
It’s worth highlighting that Metro’s sales have increased at a compound annual growth rate (CAGR) of 7.1% since 2018. During the same period, adjusted net income grew at a CAGR of over 12%. Thanks to its growing earnings base, Metro has consistently raised its dividend at a decent pace. Impressively, Metro’s dividend grew at a CAGR of 19% in the past 27 years.
Looking ahead, its value pricing, investments in conventional stores with differentiated fresh & health offerings, growing private label penetration, and focus on improving efficiency and productivity will likely drive its sales and earnings and support its future dividend payouts.
Metro stock is trading at a forward price-to-earnings multiple of 16.1, which is also lower than its historical average.
Bottom line
Loblaw and Metro own defensive businesses, consistently generate steady growth, and enhance their shareholders’ returns through higher dividend payments. However, Loblaw stock has consistently outperformed Metro. For instance, it has increased by 83% in three years and 136% in five years. In comparison, Metro stock has gained 29% in three years and 74% in five years.
Thus, when choosing one stock, Loblaw, with its better returns and lower price-to-earnings ratio, looks more compelling investment near the current levels.
