Metro – A recession-proof stock and beating the index

Metro is a leading food and pharmaceutical company based out of Quebec and Ontario and ranks amongst the largest food retailers in Canada. 

Due to the similar nature of operations, its two business segments, food operations, and pharmaceutical operations are combined into one reportable operating segment. Metro has developed a successful market segmentation strategy with its different grocery banners targeting three different market segments. Metro operates a network of 950 food stores under several banners including Metro, Metro Plus, Super C, Food Basics, Adonis and Premiere Moisson, as well as 650 drugstores primarily under the Jean Coutu, Brunet, Metro Pharmacy and Food Basics Pharmacy banners. Metro and Metro Plus are leading the Quebec and Ontario supermarket chains. Metro, Super C, Jean Coutu, and Brunet also lead the industry in terms of customer satisfaction.

Investment Data

Revenue Growth & Market Exposure

With more than seven decades of experience in the consumer industry, Metro is known for the freshness of its products and premium quality. The company has built a solid reputation and earned the trust of its customers. In order to add to customer convenience, the company is offering same-day delivery for its online grocery shopping service and also lets customers to pick-up their order at the participating stores. Metro is also investing to strengthen and modernize its distribution network. The company is looking at building new distribution centers that will offer a wider range of products and will be fully or partially automated. The transformation began in 2018 and is estimated to be completed by 2023. 

Metro is expanding both organically as well as through acquisitions that increase its customer base and retail footprint. The largest one being that of Jean Coutu group that has resulted in the creation of a $16-billion retail leader. 2019 marked the combination of Metro’s pharmacy activities with the acquisition of the Jean Coutu Group, the modernization program for its Ontario distribution centers, and the deployment of online grocery shopping. These efforts should result in better efficiencies and reduced costs for Metro. The company, however, is currently expecting to face delays in some investment projects like new automated grocery distribution centers in Ontario, and integration of warehousing and distribution activities in the pharmacy business, as a result of the COVID-19 pandemic. 

Metro registered same-store sales growth of 5.2% and 6.4% in food and pharmacy business respectively, excluding COVID-19 impact. The pandemic had a positive effect of about $0.03 in Metro’s net EPS. The sales increase due to the pandemic is estimated at $125 million. The current crisis situation further proved the resiliency of the company’s supply chain and its ability to maintain in-store operations.

Dividends

Metro is a Canadian Dividend Aristocrat. It has been raising its dividends handsomely and has grown them at an impressive rate of 16%+ CAGR over the last decade. The company’s most recent dividend hike was 12.5%, which marked the 25th consecutive year of dividend growth. It currently has a dividend yield of 1.5% and a policy of maintaining its payout ratio of near 20%-30%. Metro currently has a payout ratio of 31%. Under its current NCIB program, the company may repurchase up to 7,000,000 of its shares till November 2020. 

The acquisition of the Jean Coutu Group is anticipated to deliver synergies of $75 million within three years. Post-acquisition, Metro’s retail network has expanded to over 1,600 establishments and sales are expected to exceed $16 billion. Metro has realized $65 million in synergies so far. The company also disposed of the assets of subsidiary MissFresh (that offered customers fresh meal-kits) in December 2019 for a cash consideration of $3.5 million and recorded a loss on disposal of $7.5 million.

Metro provides essential services and therefore, enjoys a regular stream of cash flow. The company’s cash flow is sustainable as it deals in food and drug business which are necessities. Metro has spent millions of dollars in modernizing and automating facilities which will make immense sense, especially in the post-pandemic period. Growing demand for food and medicines should act as a tailwind for this Dividend Aristocrat. A proven business model, an extensive store and distribution network infrastructure, and a reputed brand name form a deep moat around Metro’s business. 

Competition

Metro faces competition not only from the traditional brick and mortar stores but also from online players. The company is expanding online shopping as well as delivery options as it faces acute pressure from Amazon.com. On the conventional front, Metro competes with Loblaw which is another leading grocery chain in Canada. Another contemporary is Sobeys, which is the second-largest food retailer in Canada. Competition remains intense amid high and rapidly changing consumer expectations.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ATD.BATD.BAlimentation Couche-Tard Inc.Consumer DefensiveGrocery Stores0.6346.5538.2116.5724.312.810.00600.600.099640.280.162285Consumable - NecessitiesYESYESYESNOCanada1
TSE:LLLoblawConsumer DefensiveGrocery Stores0.5069.4924.8625.4124.312.740.01811.810.459941.260.057846Consumable - NecessitiesNONOYESNOCanada1
TSE:WNWNGeorge Weston LimitedConsumer DefensiveGrocery Stores0.54101.1715.5518.9624.315.340.02082.080.393342.100.058246Consumable - NecessitiesNONOYESNOCanada1
TSE:DOLDOLDollarama IncConsumer DefensiveDiscount Stores0.4948.9815.2328.3124.311.730.00360.360.101740.180.102274Consumable - DiscretionaryNONOYESNOCanada1
TSE:MRUMRUMetroConsumer DefensiveGrocery Stores0.6158.7614.8220.4024.312.880.01531.530.312540.900.157675Consumable - NecessitiesYESYESYESNOCanada1
TSE:EMP.AEMP.AEmpire Co Ltd A NvtgConsumer DefensiveGrocery Stores0.5534.419.2616.0124.312.150.01511.510.241940.520.047447Consumable - NecessitiesNOYESYESNOCanada1
TSE:NWCNWCThe North West Company Inc.Consumer DefensiveGrocery Stores0.4429.801.4621.3624.311.390.04434.430.949641.320.044346Consumable - NecessitiesNONOYESNOCanada1

Bottom Line

Metro is one of Canada’s best grocers and should gain from its consumer defensive business amid the pandemic outbreak. The successful integration of Jean Coutu and growth in e-commerce act as strong tailwinds for the company. A bouquet of well-known brands, a growing stream of stable cash flows, a large presence in Canada, and strategic investments should support the company’s future dividend growth.

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DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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