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What are we looking for?

Consumer defensive stocks for investors thinking about inflation.

The screen

Canada’s annual inflation rate reached 4.7 per cent in October, signalling the cost of goods and services continues to rise. Investors who seek to take advantage of inflationary pressures might consider looking into the consumer defensive sector as Canadian consumers re-evaluate where they spend their hard-earned dollars, perhaps steering away from discretionary spending and luxury goods, and focusing on essentials instead. With this in mind, today I use Morningstar CPMS to look for companies with reasonable dividend-paying characteristics within the Canadian consumer defensive sector, which currently houses 29 companies. The idea here is that if consumer spending shifts toward basic goods, these companies might benefit.

The companies were ranked on the following metrics:

  • Dividend yield;
  • Five-year cash flow and dividend growth rates (the percentage that operating cash flows and dividends have grown each year, on average, over the past five years);
  • Five-year average return on equity;

To ensure dividends paid are likely sustainable, I screened for companies that either had a payout ratio on earnings of less than 80 per cent or a payout ratio on cash flow of less than 60 per cent.

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter.

What we found

10 consumer defensive stocks for investors thinking about inflation

RankCompanyTickerMkt. Cap. ($ Mil.)5Y CF Grth. (%)5Y Div. Grth. (%)5Y Avg. ROE (%)Div. Yld. (%)EPS Payout (%)CF Payout (%)12M Ttl. Rtn. (%)Recent Close ($)
1North West Co.Inc.NWC-T1,730.520.42.623.44.146.326.913.436.01
2KP Tissue Inc.KPT-T102.
3Rogers Sugar Inc.RSI-T588.9-
4Corby Spirit & WineCSW-A-T506.26.41.315.55.473.364.714.617.78
5Alim. Couche-TardATD-B-T54,261.724.519.122.80.710.96.914.350.96
6Waterloo BrewingWBR-T204.918.
7Metro Inc.MRU-T16,163.020.512.215.81.527.516.69.666.22
8Andrew Peller Ltd.ADW-A-T369.99.57.913.42.978.729.9-20.58.47
9Empire Co. Ltd.EMP-A-T6,617.736.
10Premium BrandsPBH-T5,832.910.311.215.31.960.934.940.1134.09

Source: Morningstar CPMS; data as of Nov. 16

I used Morningstar CPMS to back-test the strategy from January, 1998, to October, 2021, assuming an equally weighted 10 stock portfolio. Once a month, stocks were sold if they fell below the top 35 per cent of the universe based on the above metrics, or if both dividend payout ratios exceeded the aforementioned limits. When sold, stocks were replaced with next qualifying stock not already held in the portfolio. On this basis, the strategy produced an annualized total return of 13.6 per cent, while the S&P/TSX Consumer Staples Total Return Index advanced 12.1 per cent.

The stocks that meet requirements to be purchased into the strategy today are listed in the accompanying table. This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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