The fear of recession amid high inflation and rising interest rates could continue to keep the stock market volatile. Thus, it is prudent to add to few defensive and low-volatility stocks to your portfolio for stability and growth.
While the TSX has several low-volatility stocks, I’ll restrict myself to retail companies like Loblaw (TSX: L) and Dollarama (TSX: DOL) that offer a wide range of consumables.
Both these companies have been steadily growing their revenues and earnings amid all market conditions. Furthermore, these companies sell products for everyday needs at a value price, which is why they are less cyclical, perform well, regardless of the economic conditions, and regularly enhance their shareholders’ returns through increased dividends and share repurchases.
As these fundamentally strong, large-cap stocks are known to offer stability and growth, let’s examine which of these retailers could deliver higher returns.
Here’s why Loblaw is a dependable stock
Loblaw is Canada’s leading food and pharmacy corporation offering grocery, personal care, apparel, and other general merchandise. Its large scale, wide product range, and value offerings make Loblaw a household name in Canada.
Its discount stores continue to outperform thanks to the company’s focus on pricing. Meanwhile, its attractive loyalty rewards and inflation-fighting price freeze drive traffic and, in turn, its overall growth. Furthermore, the ease of shopping and wide range of private-label food products resonates well with consumers, driving its growth in all market conditions. Also, its omnichannel platform and continued investment in Connected Healthcare offerings bode well for growth.
Looking ahead, Loblaw expects its retail business to grow steadily, with earnings growing faster than sales. Moreover, the company expects its adjusted earnings per share to mark low double-digit growth in 2023.
Overall, its resilient business model and growing earnings base position it well to deliver solid returns in the long term. Loblaw stock is trading at a forward price-to-earnings multiple of 16.6, which is in line with its historical average and within investors’ reach.
Why is Dollarama a solid defensive play?
Dollarama offers a wide range of products at multiple and low fixed price points, making it a go-to place for consumers seeking value. This retailer has consistently delivered stellar growth irrespective of the market conditions. For instance, Dollarama’s sales and earnings have increased at a double-digit rate in the past decade.
Thanks to its strong growth, Dollarama stock outperformed the TSX by a wide margin. In addition, its growing earnings base enabled it to enhance its shareholders’ returns through increased dividend payments.
Its value pricing, extensive store base in the domestic market, and growing global footprint position it well to deliver strong growth in the coming years.
Dollarama is trading at a price-to-earnings multiple of 26.2, which is slightly lower than its historical average and provides a good entry point near the current levels.
Bottom line
Loblaw and Dollarama have resilient businesses and consistently deliver steady growth, which drives their stock prices higher. For instance, Loblaw and Dollarama stocks have gained over 164% and 63% in the last five years, handily exceeding the broader market averages.
However, when choosing one stock, Loblaw, with its low price-to-earnings ratio and more diversified revenue base, looks more compelling investment near the current levels.
