Like many sectors, pricing power matters and these three companies are proving their value
One area where consumers notice the effects of inflation most acutely is in the price they pay at the grocery store. However, although consumers may trim their grocery budgets, or switch their brand loyalties, they still need groceries.
That's why grocery stocks are among the best defensive stocks that investors can buy during a bear market. And here’s your playbook. First, quality matters. This is a time when national and large regional chains look better than small niche plays. And most importantly, investors should be looking for companies that have pricing power.
Grocery stores face higher input costs and have to walk a tightrope in passing those costs along to consumers. The best-in-class companies are better prepared to do this. They may cost a bit more per share, but over time these stocks are likely to generate some capital growth. And the three stocks in this article offer a growing dividend.
Costco
Costco (NASDAQ: COST) is proving to be one of the best defensive stocks for investors. One thing that sets Costco apart from other grocery stocks is its membership model. The company is proving that customers stick with their Costco subscription even as the company continues to raise its membership fee.
Costco also gives its customers gas perks. This serves as an additional inflation catalyst because consumers looking to save money on gas will buy from Costco and are more likely to double up with some grocery shopping.
COST stock has beat on earnings in its last five quarters as of its May 2022 earnings report. The warehouse chain also has delivered 24% earnings growth in the trailing twelve months. And Costco offers a solid dividend that pays out $3.60 per share on an annual basis. Although some analysts have lowered their price targets for the stock since the company’s earnings, the consensus target gives the stock 15% upside from its current level.
Kroger
Next on this list is grocery stocks is Kroger (NYSE: KR). This is a regional grocery chain that is benefiting from an investment in digital technology. The grocery chain is also seeing strength from their private label brands which help the company mitigating the effects of rising costs. In fact, in the company’s most recent fiscal year, these brands accounted for approximately 20% of sales.
Kroger has delivered 10 consecutive quarters in which it has beaten analysts’ earnings per share (EPS) expectations. And the company has delivered 14% earnings growth in the trailing twelve months.
KR stock currently has a consensus rating of Hold however since its earnings report in June, the stock has not been downgraded and, in some cases, is seeing its price targets increased.
Casey’s General Stores
Another regional grocery chain that is looking strong as a recession-proof grocery stock is Casey’s General Stores (NASDAQ: CASY). The company’s dividend payout of $1.40 is not impressive in and of itself, but if viewed as part of a larger story it becomes an intriguing feature.
First, the company’s payout ratio as of July 2022 is just 15.8%. That gives the stock a long runway to grow its dividend. And growing the dividend is something the company is known for. It’s one year away from being a member of the Dividend Aristocrat club having increased its dividend in each of the last 24 years.
The company is making a commitment to expanding its national footprint as it acquires existing convenience stores. Casey’s is also making an investment in the digital side of its business which is likely to be a catalyst for growth.
CASY stock has reported an 8% year-over-year growth in earnings per share and has beaten estimates in 7 of its last 8 quarters. Analysts give the stock a 25% upside from its level as of July 2022.
