Metro – Sustained Growth Amidst Intense Competition

MRU - MetroThe grocery business is amazing. With Amazon stepping into the grocery business with the purchase of Whole Food, you can just expect the competition to intensify, and all the grocery store operators will need to bring their ‘A’ game. In a time when location and ease of access is the name of the game, will Amazon provide an exceptional delivery service to take market share away?

In a 5 km radius, I have five grocery stores at my disposal with IGA, Save-On-Foods, Safeway, SuperStore, and Walmart. Each of them with different parking space, size, and prices. Convenience usually wins my money unless there is a large price difference on the items or a specific brand needed. The cost of shopping, convenience, and ‘the feel‘ usually wins the consumer. There is a constant effort to one-up the competition, and a lot of research is done towards consumer behaviors.

MRU Business Summary

With more than 600 food stores under the banners Metro, Metro Plus, Super C and Food Basics, Metro (TSE:MRU) is a leader in the food and pharmaceutical distribution in Québec and Ontario. In addition to the grocery stores, Metro also has more than 250 drugstores and pharmacies under the banners Brunet, Clini Plus, Pharmacy and Drug Basics.

MRU - Retail Stores
Source : 2016 Annual Report

By The Numbers

MRU Revenue

Since the 3-for-1 split executed on February 12, 2015, Metro has gained 29.26% in stock appreciation. Management continues to do well and make good use of the profits generated with acquisitions or share repurchase.

Metro is planning to repurchase up to 12,000,000 of its common shares between September 12, 2016, and September 11, 2017. Between September 12, 2016, and April 7, 2017, it had already repurchased 7,244,122 common shares at an average price of $40.66 for a total of $294.6 million.

All the top line numbers are growing as you can see below. Cash flow from operations has a CAGR growth of 6.67% compared with sales CAGR growth of 2.14%. The company appears to be excellent at managing costs considering the cash flow grows faster than the revenue. The book value per share has a CAGR growth of 7.30%.

Considering the stiff competition in the sector, the continued growth outlines a strong plan and a focused operational team.

MRU - Annual Revenue
Source : 2016 Annual Report
MRU - Per Share Financials
Source : 2016 Annual Report

MRU Dividend Summary

MRU is a Canadian Dividend Aristocrats and a Dividend Achiever amongst 33 Canadian stocks getting the honor of having more than 10 years of dividend growth. With a regular annual dividend growth above 10%, MRU has exceptional dividend growth. See below for its 3, 5 and 10 year averages.

  • 3 year average of 18.88%
  • 5 year average of 17.58%
  • 10 year average of 15.01%

The dividend growth is exceptional. The most recent dividend increase back in April provided a 16.04% increase. The current payout target is 25% giving Metro enough room to keep up with the growth. It boasts one of the lowest dividend payout ratios in the sector providing room for a continues dividend growth in the event the company faces challenges.

  • 3 year average of 23.38%
  • 5 year average of 20.27%
  • 10 year average of 19.34%

All the trends are moving in the right direction. Slow and steady.

MRU - Dividend vs EPS

Investment Philosophy #1: BUSINESS QUALITY

The grocery business is a necessity no matter how you look at it. Restaurants are too expensive to use daily so we shop at grocery stores to cook our food. The grocery stores have essentially replaced the long gone habit of hunting and living off the land.

As a middleman between the consumers and the specialty food, the grocery business is in a unique position to cater directly to the consumers and set their prices to be as profitable as possible. Companies such as High Liner Food (TSE:HLF) and Andrew Peller Ltd (TSE:ADW.A) need to rely on the grocery stores and have to continuously outdo the competition for shelf space.

The business model is sound, and the only disrupter is online shopping and Amazon. Will the consumer want to shop for grocery online? My guess is they will, and that’s the innovation the grocery stores will have to invest in.

Investing Opportunity Score: 78%

Based on my Opportunity Score formula, Metro (TSE:MRU) has a score of 78% (the higher, the better) for being an investing opportunity. Above 60% is a good range to pay attention to an opportunity. Anything around 80% would have a short window of opportunity unless the stock got beaten down for other qualitative reasons.

Loblaws (TSE:L) is the largest grocery chain in Canada by market capitalization but doesn’t boast the same growth seen by Metro. In fact, one of the closest business with similar growth in the sector that also competes with Metro is Pharmacy Jean-Coutu (TSE:PJC.A). The mix of grocery and pharmacy is giving Metro an edge in my opinion. The low dividend yield might disappoint, but with the historical growth rate, it doesn’t take many years for MRU to provide a good return on investment.

Do you want to find out where the competitors stack up against MRU? There are 12 stocks in the consumer defensive sector to be compared. Subscribe to the Dividend Performance List over at Dividend Snapshot and easily compare many key stock data points before making your next investment.

Disclosure: At the time of writing, I have a position in MRU and none in HLF, L, ADW.A, or PJC.A at the time of writing. See my Stock Portfolio for my current holdings.

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 decision at your own risk – see my full disclaimer for more details.