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What are we looking for?

Headlines about a second wave of COVID-19 are generating broad concern – and making some investors nervous. Today, my colleague Allan Meyer and I take a closer look at the Canadian consumer staples sector using our investment philosophy based on safety and value. The sector, with its goods and services in demand regardless of the economic cycle, is considered defensive and generally held up well during the first wave of the pandemic.

The screen

We started with Canadian-listed consumer staples companies with a market capitalization of $1-billion or more. We sorted the list on this metric, from largest to smallest. It is a safety factor: Larger companies tend to be more stable and liquid; they can usually be bought and sold without a significant impact on price.

Then we looked at dividend yield, the annualized payout 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 implies less volatility or smaller swings in the stock price. Anything under one is less volatile than the market.

Then, we looked at the debt-to-equity ratio as our final safety factor. It is the debt outstanding divided by shareholders' equity. A smaller number is preferred. We like companies with low debt because it’s more difficult to go bankrupt without owing any debt obligations.

The price-to-earnings ratio is the share price divided by the projected earnings per share. It is a valuation metric: the lower the number, the better the value. 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 figures over the long term could lead to increases in the share price and dividend, and vice versa for negative ones.

Finally, 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

Metro Inc., North West Co. Inc., Saputo Inc. and Lassonde Industries Inc. offer the best overall blend of safety and value. North West has the highest dividend yield and best earnings momentum. Most names on the list have low or less-than-market (under one) betas. Metro, Loblaw Cos. Inc. and Lassonde actually provide investors with negative beta. This means these names could appreciate should the market sell off. Lassonde also boasts the best value.

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

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Select TSX-listed consumer staples stocks

CompanyTickerMkt.Cap. ($ Bil.)Div. Yld. (%)BetaDebt/ Eqty. (%)P/EEarns. Mom. (%)52W Ttl. Rtn. (%)Recent Price ($)
Alim. Couche-TardATD-B-T52.00.60.8103.118.110.616.446.64
Loblaw Cos. Ltd.L-T25.21.8-0.1150.915.1-6.2-3.670.70
Metro Inc.MRU-T16.11.4-0.144.818.66.012.364.02
George Weston Ltd.WN-T15.22.10.2278.213.9-10.3-8.998.99
Saputo Inc.SAP-T13.72.10.468.418.5-1.8-15.533.37
Empire Co. Ltd.EMP-A-T10.31.40.2176.915.210.08.538.28
Premium Brands PBH-T4.02.31.0131.627.0-16.110.3100.28
Maple Leaf FoodsMFI-T3.42.30.240.122.02.9-5.327.63
Primo Water Corp.PRMW-T3.01.71.3116.639.33.315.018.57
North West Co. Inc.NWC-T1.84.00.3132.915.439.433.636.18
Jamieson Wellness JWEL-T1.61.20.367.232.52.876.940.14
Lassonde IndustriesLAS-A-T1.11.7-0.140.812.112.6-11.5154.96
Average12.31.90.4112.620.64.410.7
Median7.21.70.3109.918.33.19.4

Source: Refinitiv 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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