What are we looking for?
Highly sustainable dividends from grocers ready to take on Amazon-led Whole Foods.
The screen
Profit margins for Canadian and U.S. grocery chains are already low, but the willingness of new rival Amazon.com to absorb losses in order to win market share could send them even lower. Amazon is expected to use its technological skills to upgrade Whole Foods with its customer analytics and "click and collect" grocery model.
Which grocers have the technology and growth plans to protect their profits – and their dividends? Our search started with our extensive list of dividend-paying Canadian and U.S. food retailers. We then singled out those that have already developed online shopping. They've also cut costs, increased economies of scale, enriched the shopping experience and expanded their geographical reach.
We then applied our TSI Dividend Sustainability Rating System. It awards points to a stock based on key factors:
- One point for five years of continuous dividend payments – two points for more than five;
- Two points if it has raised the payment in the past five years;
- One point for management’s commitment to dividends;
- One point for operating in non-cyclical industries;
- One point for limited exposure to foreign currency rates and freedom from political interference;
- Two points for a strong balance sheet, including manageable debt and adequate cash;
- Two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments;
- One point if the company is a leader in its industry.
Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.
More about TSI Network
TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor. TSI Dividend Advisor is the latest. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated five stocks ready to prosper and maintain their payouts, despite Amazon. Wal-Mart, for instance, has an unrivalled store base and low costs; Loblaw has upgraded its locations and computer systems; Metro is dominant in the hard-to-crack Quebec market; Costco has loyal members and rock-bottom prices; and North West has sustained profitability in Northern Canada – where most retailers fear to go. All five of these top stocks appear in the accompanying table.
We advise investors to do additional research on any investments we identify here.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.