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In the past two decades, Canadian blue-chip stocks such as Loblaw (TSX:L) have created inflation-beating returns for shareholders. For instance, Loblaw stock has returned over 125% since November 2003, and after adjusting for dividends, these returns are much higher at 252%.
Despite these market-thumping gains, Loblaw stock trades 5% below its all-time highs and pays shareholders an annual dividend of $1.78 per share, translating to a forward yield of 1.5%.
Valued at $38 billion by market cap, Loblaw is among the largest companies on the TSX. Part of a recession-resistant sector, Loblaw is a grocery giant and a top investment choice for your equity portfolio.
Let’s see why.
How did Loblaw perform in Q3?
Loblaw is primarily a food and pharmacy company. Over the years, it has entered segments such as financial services and wireless mobile products. It has two primary business segments:
- Retail: Loblaw operates corporate and franchise-owned retail food and drug stores here.
- Financial Services: The segment provides credit card and banking services, the PC Optimum program, insurance brokerage services, and telecommunication services.
In the third quarter (Q3) of 2023, Loblaw reported revenue of $18.26 billion — an increase of 5% year over year. While retail segment sales were up 5% at $17.9 billion, e-commerce sales rose by 13.6%. The company ended Q3 with an operating income of $1.06 billion — an increase of 7.5% year over year.
Loblaw focused on providing value across its Food and Drug Retail businesses, which led to sales growth, higher unit sales, and increased market share. Its drug retail sales reflected robust demand for in-store beauty products and prescription products.
Customers are seeking quality and value to tide over an inflationary environment, which has acted as a tailwind for Loblaw’s Food Retail segment. Its discount stores have benefitted from increased foot traffic, as Loblaw continues to invest in opening new such stores.
Loblaw emphasized investments to lower food prices were reflected in its internal food inflation, which was lower than Canada’s food CPI (consumer price index). Moreover, higher sales and cost-control initiatives drove adjusted earnings growth in Q3.
Loblaw’s chairman, Galen G. Weston, stated, “Our stores are delivering more value, including deeper discounts on essentials, and customers are responding positively. We remain focused on doing what we can to fight inflation and deliver lower prices for Canadians while continuing to invest for the future.”
Is Loblaw stock undervalued?
Despite rising costs, Loblaw is forecast to increase adjusted earnings from $6.82 per share in 2022 to $8.35 per share in 2024. So, priced at 14.4 times forward earnings, Loblaw stock is quite cheap, given its future growth estimates.
Loblaw expects its retail business to grow earnings faster than sales in 2023. It also aims to increase investments in its store network and distribution centres by $1.6 billion in capital expenditures. This includes an investment of $2.1 billion offset by $500 million received in proceeds from real estate dispositions.
A widening earnings base should also fuel dividend growth for shareholders. The company reported a free cash flow of $756 million in Q3 and paid shareholders dividends worth $141 million, indicating a payout ratio of less than 19%, providing it with enough room to increase these payments.
In the last 20 years, Loblaw has increased dividends by 6.8% annually, showcasing the resiliency of its cash flows.
