What are we looking for?
My colleague Allan Meyer and I take a closer look at the Canadian consumer-staples sector using our investment philosophy focused on safety and value.
We started our search by filtering for Canadian-listed consumer staples with a market capitalization of $1-billion or more. We sorted the list on this metric, from largest to smallest. We view market capitalization as a safety factor, larger companies usually have more stable revenue streams. They also tend to be more liquid, they can usually be bought and sold without a significant price impact.
Then we looked at dividend yield, the annualized dividend divided by the recent share price. Dividends generally reflect safer and more stable companies. As Allan and I like to tell clients, we like to get paid while we wait for capital appreciation.
Next, we looked at debt-to-equity as a safety factor. It is the total debt outstanding divided by shareholders' equity. A smaller number indicates lower leverage and anything under 100 implies a company has enough equity to pay its debt obligations. We like companies with little or no debt as it's difficult to go bankrupt without owing any debt obligations.
Price-to-earnings is the share price divided by the projected earnings per share. It is a valuation metric – the lower the number, the better the value. We like low price-to-earnings multiples; as value investors, we are always looking to get a deal.
Earnings momentum is the change in annualized earnings over the past quarter. A positive number implies earnings are growing while the opposite is true for a negative number. Positive earnings momentum over the long term should translate to share price appreciation and dividend increases. The opposite is true for negative numbers over the long term.
Finally, return on equity reflects profitability – a higher number is better. It is calculated by dividing net income by shareholders' equity.
We've calculated the average and median for all metrics to allow for better comparability.
What did we find?
Metro Inc. looks interesting as it shows sign of value, low debt or leverage levels and solid return on equity. Alimentation Couche-Tard Inc. also scores well on most metrics. The negative earnings momentum and high valuation on Empire Co. Ltd. should be noted.
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.
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Select Canadian consumer staple stocks
|Company||Ticker||Market Cap ($Bil)||Dividend Yield (%)||Debt to Equity (%)||Price to Earnings||Earnings Momentum (%)||ROE (%)|
|George Weston Ltd.||WN-T||14.8||1.5||169.3||15.8||2.5||10.8|
|Maple Leaf Foods Inc.||MFI-T||4.2||1.4||0.5||22.1||5.1||8.1|
|Jean Coutu Group PJC Inc.||PJC.A-T||3.9||2.3||0.0||19.6||-2.6||19.9|
|Premium Brands Holdings||PBH-T||2.5||2.0||100.2||25.1||6.2||18.5|
|North West Company Inc.||NWC-T||1.6||4.0||62.3||18.1||-0.6||21.3|
Source: Thomson Reuters, Wickham Investment Counsel Inc.