Fight Food Inflation With Grocery Stocks Loblaw, Metro, Empire For Momentum Investors

You may have noticed higher prices at your grocery store. Year-over-year food inflation has hovered near the 11% mark since last autumn, Statistics Canada (StatsCan) figures show, and rising grocery prices show no sign of stopping. Canada's Food Price Report, published by Dalhousie University and the universities of British Columbia, Saskatchewan, and Guelph, predicts overall Canadian grocery prices will rise by five to seven per cent in 2023.

"At 7%, our forecast a year ago was considered by many to be alarmist, yet here we are with a food inflation rate above 10 %," the report says.

StatsCan blamed weather problems for adding to the soaring cost of vegetables, which increased by 13.6% in December 2022 after an 11.2% rise in November. The price of tomatoes was up 21.9%, and other fresh vegetables rose by 11.7%. Other products with significant cost increases were non-alcoholic beverages (+16.6%), bakery products (+13.5%), coffee and tea (+13.2%), other food preparations (+11.5%) and preserved fruit and fruit preparations (+7.2%), StatsCan said.

In a detailed mid-November report, Behind the Numbers: What's Causing Growth In Food Prices, 'StatsCan's Allyson Fradella explains the factors behind food inflation. Supply chain disruptions, labour shortages, changes in consumer purchasing patterns, poor weather in some growing regions, tariffs, higher input costs, and higher wages have all contributed to the problem. Many factors have been occurring simultaneously or in a more pronounced manner, leading to broad-based increases in food prices, the report says.

Critics have taken aim at grocery chains, accusing executives and managers of exploiting inflation to benefit themselves.

Michael Medline, CEO of grocery chain Empire Co. Ltd., fought back during the company's annual meeting last September. Mr. Medline defended Empire against what he called "armchair quarterbacks", adding he was fed up with critics who suggest the company was exploiting inflation to  post record profits. Grocers are succeeding despite inflation, not because of it, he said. "I refuse to apologize for our success", he said. "We didn't come here by accident.“

Mr. Medline's comments may have helped fuel the NDP's successful appeal to have the federal Parliamentary Standing Committee on Agriculture examine food price inflation. In a 5 December 2022 meeting, the committee agreed to invite the CEOs of Canada's three largest grocery chains—Mr. Medline, Galen Weston of Loblaw Companies Ltd., and Eric La Flèche of Metro Inc.—to appear before the committee in 2023 to discuss the problem.

In a 17 January 2023 post on Twitter, federal NDP leader Jagmeet Singh said, "Greedy CEOs are taking advantage of inflation to line their pockets, and the Liberals and Conservatives are allowing them to do so. It's wrong and unjust," he said, taking pains not to be seen wearing one of his two Rolex watches.

The NDP site urges Canadians to fight food inflation by supporting Mr. Singh and his party. Other methods of dealing with the problem include contacting your local M.P. and protesting outside your local store, likely to no avail. In my opinion, it's easier to join the greedy CEOs and buy grocery stocks in hopes the resulting dividends and capital gains may offset higher food prices.

Loblaw Companies Ltd. (L)

Loblaws is Canada's largest grocery chain, with a market capitalization (shares times share price) of $37.4 billion. Along with its namesake stores, the company's banners include Shoppers Drug Mart, No Frills, Real Canadian Superstore, T&T Supermarket, P.C. Express, Maxi, Fortinos, Provigo, Valu Mart, Your Independent Grocer and Zehrs. The company operates more than 2,400 stores across Canada and has more than 190,000 employees, while its site says the company believes 90% of Canadians live within ten kilometres of one of its locations.

In the third quarter of 2022, Loblaw earned $556 million, up $125 million or 29% over the same quarter of 2021, on revenue of $17.338 billion, which itself was up 8.3% over the same quarter in the previous year. The company paid $403 million to buy back 3.4 million shares. Helped by the buyback, earnings per share climbed to $1.69, up 42 cents or 33.1% over the same quarter of the previous year. While food inflation was near 11%, Loblaws reported that retail food sales for the quarter grew by 6.9% as "food retail basket size decreased .”

Loblaw's three-month-long price freeze on more than 1,500 No Name products, originally announced 17 October 2022, ended 31 January 2023. When Loblaw announced the freeze last fall, competitor Metro said such a seasonal freeze is common in the industry.

Loblaw's share price dipped below $110 on a couple of occasions last fall before peaking at more than $120 in December 2022. At a recent price of $$115.19, the annual dividend of $1.62 yields about 1.4%. Loblaw raised its dividend by 11% last year, the largest increase of the eleven hikes since 2012. When the dividend is factored in, Loblaw's total return as of February: 16.5% over one year, 19.6% over three years, 16.0% over five years, figures from both Morningstar and YCharts show.

Analysts expect Loblaw's 2022 earnings to come in at $6.73 per share, giving the stock a P/E ratio of about 17.7.

Metro Inc. (MRU)

Montreal-based Metro Inc. operates a network of 975 food stores, primarily in Quebec and Ontario, which makes it less geographically diversified than Loblaw. Along with its namesake stores, Metro owns Food Basics and pharmacies under banners that include the Jean Coutu chain, which Metro acquired in 2018 for $4.5 billion. The company typically reports annual sales of more than $11 billion and employs more than 65,000. Labour costs may increase Metro's costs as Quebec passed legislation increasing the minimum wage by seven per cent, effective 1 May 2023.

For most of 2022, Metro's shares zigzagged between $67 and $72, then jumped above $77 on positive fourth-quarter results reported in mid-November. The stock has since settled back to a recent price of about $70. Metro's average annual total return, including dividends, is 8.5% over the past year, 11.35% over three years and 13.4% over five years, figures from Morningstar show.

On 24 January 2023, Metro reported a net income of $231.1 million in its fiscal first quarter, up 11.3% from the $207.7 million it reported in the same quarter a year ago. Earnings came in at $1.00 per share, up from 88 cents. Metro's sales in the quarter totalled $4.67 billion, up 8.2% from about $4.32 billion in the first quarter of 2022, mainly thanks to inflation, Eric La Flèche, Metro's CEO told shareholders.

"In 2022, Metro received more than 27,000 price increases averaging more than 10% from suppliers for dry groceries alone — nearly three times the annual average," Mr. La Flèche said. "This high inflation over the past several months is difficult for everyone to accept, but it is a global reality. Canada is faring better than most countries."

The company increased its dividend by 10% to $1.21, the twenty-eighth consecutive annual dividend increase. At a recent share price of about $70, the stock yields about 1.7%. Metro paid $52.2 million to buy back 696,000 of its shares in the first quarter at an average price of about $75. Analysts expect Metro to earn about $4.44 per share in 2023, giving the stock a forward P/E ratio of about 15.8.

Empire Co. Ltd. (EMP.A)

Stellarton, N.S.-based Empire has 1,598 stores across Canada. The company's brands include 255 Sobeys stores, along with FreshCo, IGA and IGA Extra, Thrifty Foods, Needs and Safeway. In 2018 Empire bought the Farm Boy chain, which now has 47 locations. Empire generates about $30.8 billion in annual sales and employs roughly 130,000 workers.

On 15 December 2022, Empire reported results for the second quarter of its fiscal 2023 year. The company posted net earnings of $189.9 million or 73 cents per share, up 8.3% from $175.4 million (66 cents) for the same quarter in the previous year. Empire announced an agreement to sell its 56 retail gas stations in western Canada to Shell for about $100 million.

The company has a market cap of $9.53 billion and $16.59 billion in assets. Empire's shares went into a five-month slide in 2022, falling to less than $34 in October from a peak of more than $45 in April. Since then, the stock has recovered to about $37. At that price, the shares have a P/E ratio of 12.8 and the annual dividend of 66 cents yields about 1.8%.

The grocery stocks have been solid investments, and profits are running high. There are risks, however. As prices rise, grocery shoppers may move to competitors such as Walmart Inc. and Costco Wholesale Corp. As well, many grocery store staff are unionized, and any wage increases will add to the grocery companies’ costs. The share prices of grocery chains are no bargain as revenue and earnings have been rising, and as a result, investors have pushed up their share prices to optimistic levels, making grocery stocks best suited to momentum investors.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca