Like many other industries, pricing power matters and these three companies prove their worth
One area where consumers feel the effects of inflation most sharply is the price they pay at the supermarket. While consumers can cut their grocery budget or switch brand loyalty, they still need groceries.
That’s why groceries are among the best defensive stocks investors can buy during a bear market. And here’s your script. First, quality is important. This is a time when national and large regional chains look better than small niche games. Most importantly, investors should look for companies with pricing power.
Supermarkets have to deal with higher import costs and have to walk a tightrope to pass those costs on to the consumer. The best-in-class companies are better prepared for this. They may cost a little more per share, but over time, these stocks are likely to generate some capital appreciation. And the three stocks in this article offer a growing dividend.
Costco (NASDAQ: COST† turns out to be one of the best defensive stocks for investors. One thing that sets Costco apart from other supermarket stocks is its membership model. The company proves that customers will stick with their Costco subscription even if the company continues to increase its membership fee.
Costco also gives its customers gas benefits. This serves as an additional inflation catalyst, as consumers looking to save money on gas will buy from Costco and be more likely to double down on some groceries.
COST stocks have beaten earnings in the last five quarters as of the May 2022 earnings report. The warehouse chain has also posted 24% earnings growth in the past 12 months. And Costco offers a solid dividend that pays $3.60 per share on an annualized basis. While some analysts have lowered their price targets for the stock since the company’s earnings, the consensus target puts the stock 15% up from current levels.
Next on this list is the supermarket stocks Kroger (NYSE: KR†† This is a regional supermarket chain that benefits from an investment in digital technology. The supermarket chain also sees strength in its private label brands that help the company mitigate the effects of rising costs. In fact, in the company’s most recent fiscal year, these brands accounted for: about 20% of the turnover†
Kroger has delivered 10 consecutive quarters exceeding analyst expectations for earnings per share (EPS). And the company has posted 14% earnings growth in the past 12 months.
KR stocks currently have a consensus rating of Hold, but since the earnings report in June, the stock’s rating has not been downgraded and in some cases, price targets have been raised.
Casey’s General Stores
Another regional supermarket chain that looks strong as recession-proof supermarket stock is: Casey’s General Stores (NASDAQ: CASY†† The company’s $1.40 dividend payout isn’t impressive on its own, but when viewed as part of a larger story, it becomes an intriguing feature.
First, the company’s payout ratio is only 15.8% as of July 2022. That gives the stock a long runway to grow its dividend. And increasing the dividend is something the company is known for. It’s one year away from being a member of the Dividend Aristocrat club, which has increased its dividend in each of the past 24 years.
The company is committed to expanding its national presence by acquiring existing convenience stores. Casey’s is also investing in the digital side of its business, which is likely to be a catalyst for growth.
CASY stocks have reported annualized EPS growth of 8%, surpassing estimates in 7 of the last 8 quarters. Analysts say the stock is up 25% from its July 2022 level.
Costco Wholesale is part of the londonbusinessblog.com Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.