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What are we looking for?

The “R” word is popping up regularly in the media, making some investors nervous. Although my colleague Allan Meyer and I aren’t anticipating a recession in the short term, we thought we would take a closer look at the Canadian consumer staples sector using our investment philosophy focused on safety and value. This may help nervous investors because the sector is defensive and should hold up well should a recession come our way. After all, consumption of household staples such as food, beverages and other items would continue regardless of a downturn.

The screen

We started with 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 diverse and steadier revenue streams. They also tend to be more liquid, so 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.

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Beta tracks a stock’s volatility in relation to the general market. A lower number is better and generally implies less volatility.

We looked at debt to equity as our final safety factor. It is the debt outstanding divided by shareholders’ equity. A smaller number is preferred. We like companies with little or no debt – it’s more 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. Allan and I like low P/E 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 numbers over the long term could signal share price and dividend increases, and vice versa for negative numbers.

We’ve calculated the average and median for all metrics to allow for better comparability and 52-week total return to track performance.

What we found

Alimentation Couche-Tard Inc., Metro Inc. and Empire Co. Ltd. offer the best overall blend of safety and value. George Weston Ltd. is the least expensive but also has the highest debt levels. North West Co. Inc., Empire and Couche-Tard have negative betas, which implies these names will appreciate should the market fall.

Investors should contact an investment professional or conduct further research before buying any of the securities listed below.

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Select TSX-listed stocks in the consumer staples sector

CompanyTickerMkt. Cap. ($ Bil.)Recent Price ($)Div. Yld. (%)BetaDebt/Equity (%)P/EEarns. Momentum (%)52W Ttl. Rtn. (%)
Alim. Couche-Tard Inc.ATD-B-T44.139.080.6-0.277.917.62.827.9
Loblaw Cos. Ltd.L-T25.269.221.80.474.215.1-2.235.1
George Weston Ltd.WN-T16.3106.012.00.6210.913.81.018.6
Saputo Inc.SAP-T15.437.691.80.544.220.30.6-3.5
Metro Inc.MRU-T14.054.951.50.246.917.35.734.4
Empire Co. Ltd.EMP-A-T9.434.461.4-0.150.515.98.047.7
Maple Leaf Foods Inc.MFI-T3.629.172.00.719.121.1-0.9-3.5
Premium Brands Hldgs.PBH-T3.389.292.40.5149.120.40.00.1
Cott Corp.BCB-T2.316.761.90.7114.728.1-2.7-10.6
North West Co. Inc.NWC-T1.427.494.8-0.3126.615.7-3.22.6
Lassonde IndustriesLAS-A-T1.2175.011.40.248.216.0-3.7-24.7
Average2.00.387.518.30.511.3
Median1.80.474.217.30.02.6

Source: Eikon & Wickham Investment Counsel Inc.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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