Central banks globally have raised interest rates in the last 12 months to tame inflation. But commodity prices remain elevated, indicating investors should brace for additional hikes in bond yields. The rising cost of debt makes it expensive for corporates to fund their expansion plans, which typically results in lower capital expenditures and a deceleration in the growth of future cash flows.
There is a good chance higher interest rates will push economies into a recession, making the stock market even more volatile in the near term. However, there are a few companies part of the TSX that generate cash flows and earnings across market cycles. These companies are part of recession-resistant sectors such as telecom, utilities, consumer staples, and healthcare.
One such Canadian consumer staples stock you can buy and hold in your TFSA (Tax-Free Savings Account) for a recession is Dollarama (TSX:DOL). Let’s see why.
Is Dollarama a good stock to buy?
Valued at a market cap of $22.6 billion, Dollarama has already surged a whopping 2,470% since its IPO (initial public offering) in October 2009. Among the most popular value retailers in the country, Dollarama ended the fiscal third quarter (Q3) of 2023 (ended in October) with 1,462 stores in Canada after it opened 18 net new stores in the quarter.
With an average store size of 10,443 square feet, Dollarama offers a wide assortment of low-cost consumable products that are priced at a maximum of $5. These stores are owned and operated by the company, allowing it to provide a consistent shopping experience to customers. Several Dollarama stores are located in high-traffic areas in major cities and towns.
Dollarama is focused on growing sales, operating income, net income, cash flows, and earnings per share by expanding its store network at a sustainable pace. Its revenue has increased from $3.78 billion in fiscal 2020 to $4.8 billion in the last 12 months. Comparatively, in the last five years, adjusted earnings soared at an annual rate of 10.2%.
The COVID-19 pandemic accelerated the shift towards online shopping, and Dollarama now has a significant digital presence, allowing shoppers to buy products in large quantities that may not be available in store.
Dollarama also has operations in Latin America via a 50.1% equity interest in Dollarcity, a value retailer headquartered in Panama. Dollarcity has close to 400 stores located in Columbia, Peru, El Salvador, and Guatemala.
DOL stock pays investors a dividend
Analysts tracking Dollarama expect the company to report sales of $5 billion in fiscal 2023 and $5.44 billion in fiscal 2024. Its adjusted earnings are also forecast to rise by 18.6% annually in the next five years.
Due to its healthy profit margins, Dollarama pays investors annual dividends of $0.22 per share, indicating a payout ratio of less than 10% and a forward yield of 0.3%. So, Dollarama has enough room to increase dividends in the future as well as reinvest cash flows to support future growth initiatives. In the last 12 years, Dollarama has increased dividends by 11.5% annually.
Priced at 25 times forward earnings, DOL stock is reasonably valued. Analysts remain bullish on the Canadian retail stock and expect shares to gain around 15% in the next 12 months.