2 Top TSX Defensive Stocks to Own in a Recession

Buy these two defensive TSX companies that are providing essentials services during the COVID-19 crisis.

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For the past 10 years, investors have enjoyed a nice upward trajectory on the TSX. Of course, there have been a few blips here and there, yet nothing like the market crash we just experienced.

It is rarely easy to predict and plan for a recession, never mind one created by a global pandemic. So if you are feeling less than properly prepared, know that you are not alone. Yet, for investors with financial capacity and some serious nerve, there are ample buying opportunities.

Below are two defensive stocks that you may want consider adding to your portfolio. Both companies are considered providers of “essential services or products” and continue to operate despite COVID-19 restrictions. And both present excellent value now, with the potential for significant growth in the future.

Essential products

Dollarama (TSX:DOL) is a well-known neighbourhood brand across Canada. On any given Saturday, Dollarama seems to be the place I find myself wandering. Here I can buy just about anything, from cleaning supplies, gardening tools, or movie night snacks, to my daughter’s princess-themed birthday decorations. Since everything seems so affordable (generally between $1.00 and $4.00) I often end up buying way more than I need.

While many businesses are shut down, Dollarama is ramping up operations in several its Canadian stores. A number of jurisdictions have labelled it an essential retailer and permitted it to remain open. In the run for toilet paper, cleaning supplies, and stay-at-home snacks, Dollarama could see a short-term boost to sales over this crisis period.

Growth options

Dollarama also has a reasonable growth pipeline. Many areas in Canada remain under-penetrated. Dollarama estimates it can still add a further 400 locations over the next seven years (about 5% average growth per year). As well, Dollarama recently purchased a 50.1% stake in Dollarcity, a chain in South and Central America. That should further supplement the company’s growth opportunities over the long run.

New geographic expansion does have its risks; however, Dollarama’s management has an excellent record of executing its strategy. Its eight-year net earnings compound annual growth rate (CAGR) of 21.3% demonstrates this pretty clearly. Dollarama is trading around 19% lower than in January. I wouldn’t hesitate putting this discounted growth staple on my buy list.

Essential services

When I think about defensive stocks, I like companies that keep the lights on, literally. Fortis (TSX:FTS)(NYSE:FTS) does that for over 3 million customers across North America. Spread across 10 operations, Fortis operates regulated electric and gas services, transmission services, and electrical generating assets. 99% of its services are regulated, giving it a monopoly wherever it operates. Despite volatile economic times, people still need electricity and natural gas. This gives Fortis a very defensive and safe positioning.

Fortis has an $18.8 billion capital plan to invest in various transmission, distribution, and renewable generation projects. Consequently, it anticipates growing its rate base by a CAGR of 6.5% for the next five years. The company is very conservatively financed with a cash from operations to debt ratio of only 12%.

Trend benefits

S&P Global has rated Fortis an A-, which means it can acquire financing at very attractive rates. The recent drop in the Bank of Canada’s interest rates should further reduce the cost of long-term capital and help create more attractive yielding returns.

At present, Fortis stands to benefit from a few trends. The U.S. dollar remains strong. The U.S. is the source of 65% of Fortis’ earnings, so the strength of the greenback may give overall earnings an exchange boost. In addition, Fortis is a good candidate to attract investment from the environmental, social, and governance movement. As 93% of its assets are related to transmission or distribution, it has very little environmental impact.

Fortis has an impressive 46-year history of raising its dividend. I appreciate solid consistency like that. This stock is never going to skyrocket, but it will give investors a healthy 3.8% yield, a 6% dividend growth rate, and 6% annual cash flow growth. For the level of safety Fortis provides, 8% to 10% total annual returns sound like a pretty fantastic deal if you ask me.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robin Brown has no position in any of the stocks mentioned.

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