Many investors may overlook Metro (TSX:MRU) stock due to its modest 1.5% dividend yield, but doing so would be a missed opportunity. While the yield may seem low at first glance, the long-term potential of Metro stock is compelling.

Over the last decade, Metro has delivered impressive returns, leading to annualized gains of over 13%. In fact, an initial $10,000 investment in Metro shares 10 years ago would now be worth around $35,568 – an incredible increase in purchasing power. So, is Metro stock worth considering despite its small dividend yield? Let's explore why this stock is more than just about the payout.

Metro's dividend track record

While a 1.5% dividend yield may not seem attractive compared to high-yield stocks, Metro has proven itself as a reliable dividend grower over the years. The company has successfully raised its dividend for 29 consecutive years, which is an impressive track record that shows its commitment to returning value to shareholders. This dividend growth is supported by Metro's stable and growing earnings, fueled by its dominant position in the grocery and pharmacy space in Quebec and Ontario.

Metro's grocery store brands – Metro, Metro Plus, Super C, and Food Basics – are household names in Eastern Canada, while its pharmacy operations, including Jean Coutu, Brunet, and Metro Pharmacy, add another layer of defensive business resilience. Because these businesses are essential, even in economic downturns, Metro is able to generate steady cash flow, allowing for continued dividend increases.

Solid long-term growth potential

Beyond dividends, Metro's growth prospects are an important factor for investors. Over the past decade, the company has posted a compound annual growth rate (CAGR) in sales of about 8.4%, leading to an operating income growth rate of 10.9%. Its diluted earnings per share (EPS) grew at a rate of 6.1% annually, and its dividend growth has outpaced this at an impressive 13.8% per year.

Even though its dividend payout ratio has risen over time due to dividend increases surpassing earnings growth, the payout ratio remains at a comfortable and sustainable level of around 30%. This means Metro has plenty of room to continue reinvesting in its business while rewarding shareholders with growing dividends. Investors looking for a solid, reliable growth story should take note of Metro's continued ability to generate solid returns.

Defensive business model that's resilient in tough times

Another key reason why Metro is worth considering, even with its small yield, is its defensive business model. As a grocery and drugstore retailer, Metro is well-positioned to weather economic uncertainty. The company's business is resilient during periods of economic stress, as consumers continue to buy food and pharmaceutical products regardless of market conditions. This has been evident over the past 20 years, during which Metro's adjusted earnings per share has only declined in two years, and in both cases, the decline was minimal (around 2%), followed by a strong recovery in the subsequent year.

Metro's stability in both sales and earnings makes it an attractive option for conservative investors, especially during times of market volatility or recessions. Even during a downturn, people still need to eat and fill prescriptions, making Metro's stock a defensive choice for investors.

Is Metro stock a buy today?

At $86.47 per share at writing, Metro trades at a reasonable price-to-earnings (P/E) ratio of around 20. Analysts consider this fair, given the company's projected earnings growth of about 10% annually over the next couple of years. While its dividend yield is modest, Metro's total return potential – driven by earnings growth, dividend increases, and its defensive business model – offers strong appeal.

With its solid track record of growth, stability, and dividend increases, Metro may be a good buy for those looking for long-term returns with a reliable income stream. That said, Metro is set to report its fourth-quarter results on November 20. Therefore, investors may want to wait for these results to gain more clarity on the company's outlook before making a decision.