Better Canadian Stock to Buy: Canadian Tire (TSX:CTC.A) vs. Alimentation Couche-Tard (TSX:ATD.B)

Although both Canadian Tire stock and Alimentation Couche-Tard are great investment candidates, one is better than the other on certain key points.

| More on:
Where to Invest?

Image source: Getty Images

Whether it be potential trouble with mutated Alpha and Delta variants of the coronavirus or increased market jitters from unexpected high inflation in North America, there’s a significant sense of capital safety when you invest in TSX stocks of well-established businesses that have survived all known recessions and expanded during historical economic booms. Two such strong businesses include Alimentation Couche-Tard (TSX:ATD.B) and the Canadian Tire (TSX:CTC.A). Which of the two top Canadian stocks should you buy first?

Canadian Tire is a specialty retailer (a consumer cyclical business) that survived lockdowns and came out of a pandemic-stricken year 2020 with its investment-grade credit rating intact. Alimentation Couche-Tard is a growing international grocery store operator (a consumer defensive business) that can thrive during recessions.

If you are wondering which of the two strong businesses to buy right now, here’s a head-to-head comparison of the prospects of Alimentation Couche-Tard stock against Canadian Tire stock during the next year.

Which stock to buy for higher dividend income?

Alimentation Couche-Tard pays a $0.087 quarterly dividend that currently yields a low 0.72% annually. The company could increase its dividend by nearly 23% next year. The compound annual dividend-growth rate was 17.5% over two consecutive years. However, the yield will only increase to about 0.98%, which will still be too low for an income-oriented investor to consider.

Canadian Tire stock pays a $1.175 quarterly dividend which currently yields a respectable 2.46% annually. The payout could increase by 10.5% next year to yield 2.7% for 2022. Investors can actually buy shares in Canadian Tire for dividend income purposes. The company has a dividend-reinvestment policy (DRIP).

Future revenue and earnings-growth outlook to 2022

Analysts expect Alimentation Couche Tard to grow its revenue by 29% for the calendar year 2021 followed by a cooled-off 2.4% top-line growth in 2022. However, normalized earnings per share (EPS) could decline slightly by 2.6% this year before making a 4.9% recovery next year. The company’s aggressive share-repurchase programs aid normalized earnings-per-share growth.

Unlike Alimentation Couche-Tard, Canadian Tire is expected to grow sales by 4.5% in 2021. CTC’s revenue growth could slow down to 0.5% for next year. However, after a surge in online sales during the pandemic, rising margins, and well-timed share repurchases, Canadian Tire should grow its earnings by 23% for 2021 and 2.5% next year. Higher earnings growth should justify rising share prices.

Which company is cheaper to invest in?

Using the PEG ratio, a valuation tool popularized by value investor Peter Lynch, Canadian Tire stock has a PEG ratio of 1.4, which is higher than one. This implies CTC shares are expensive or potentially overvalued.

If you think shares in Canadian Tire are expensive given the company’s expected future earnings-growth rate, compare its PEG of 1.4 to Alimentation Couche-Tard’s PEG ratio of 4.7. Yes, shares in Alimentation Couche-Tard are much more expensive right now.

Which has better future investment returns potential?

So, how much of a return can a new investors expect to earn on Alimentation Couche-Tard and Canadian Tire stock over the next 12 months?

Analysts maintain an average price target of $229.99 on CTC shares today. This implies a potential 19% upside over the next 12 months. Add a 2.4% dividend yield, and you have a potential 21% total return by this time next year.

Alimentation Couche-Tard shares currently trade at $48.93, and the average analyst price target is at $54.73. This implies a potential 11.9% price return over the next 12 months, or an under 13% total return over the next year.

That said, let’s be cautious that share prices on the market can stray from analyst targets for months.

Foolish bottom line

Both companies are great investment candidates for new money. They have convincing histories of great revenue and earnings growth, and they retain great and innovative management teams.

Canadian Tire is a better bet if you prefer recurring and growing dividend income. But if you want to spread capital risk internationally, Alimentation Couche-Tard will offer more geographical diversification.

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 Brian Paradza has no positions in any stocks mentioned. The Motley Fool owns shares of and recommends ALIMENTATION COUCHE-TARD INC.

More on Dividend Stocks

Dividend Stocks

1 Oversold Dividend Stock I’d Buy in December 2022

Here’s one of the best Canadian dividend stocks to buy in December that I find undervalued.

Read more »

Make a choice, path to success, sign
Dividend Stocks

Algonquin Power Stock: Time to Buy or Buyer Beware?

Algonquin Power stock has a massive 9.5% dividend yield. It looks appealing, but is it time to buy or beware?

Read more »

TFSA and coins
Dividend Stocks

2 Top TSX Stocks to Buy Now for TFSA Passive Income

Stocks with good dividend growth are now on sale for investors seeking passive income.

Read more »

Dividend Stocks

2 TSX Stocks to Buy in December for Passive Income

These two TSX dividend stocks are some of the best to buy today and can offer years of growing passive…

Read more »

Increasing yield
Dividend Stocks

2 High-Yield Dividend Stocks You Could Hold for Years

You can consider adding these two large-cap Canadian dividend stocks to your portfolio now to hold for the long term.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

How to Turn a $10,000 TFSA or RRSP Into $415,000 for Retirement

This investing strategy has made some patient investors quite rich.

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

3 Essential Stocks I’d Buy No Matter the Price

These essential stocks aren't just good options right now; they're stable choices for decades for investors looking to set up…

Read more »

Growth from coins
Dividend Stocks

TFSA Investors: Buy and Forget This Top Oversold Dividend Stock

This dividend stock has seen shares collapse this year, with a poor year expected. But does that mean it's a…

Read more »