Central banks worldwide have adopted monetary tightening initiatives to stem rising inflation, including raising interest rates. Last month, the Bank of Canada increased its benchmark interest rates by 0.25% to 4.75%. It was the first hike since January. Meanwhile, interest rates in Canada have reached the highest level since May 2001. A prolonged high-interest rate environment could hurt global growth, thus impacting equity markets.
However, certain companies are less susceptible to rising interest rates. Here are my two top picks that investors can buy to safeguard their portfolio in this high-interest rate environment.
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Pizza Pizza Royalty
Pizza Pizza Royalty (TSX:PZA) operates Pizza Pizza and Pizza 73 brand restaurants through a highly franchised business model. It collects royalties from its franchisees based on their sales. So, rising prices and wage inflation will have little impact on its financials. Besides, the company continues to deliver solid performances, with its same-store sales growing by 13.6% in the March-ending quarter.
The growth in consumer traffic and cheque size drove its same-store sales. The reopening of non-traditional restaurants, value messaging, and brand promotions drove its traffic, while higher pricing and a favourable sales mix boosted its cheque size. Also, the company’s adjusted EPS (earnings per share) grew by 16.2%. Supported by its strong financials, the company has raised its monthly dividends seven times since April 2020. It pays a monthly dividend of $0.075/share, with its yield currently at 6.08%.
Further, given its restaurant expansion plans and same-store sales growth, I expect the uptrend in Pizza Pizza Royalty’s financials to continue. Additionally, given its asset-light business model, rising interest rates will not hurt its growth. Meanwhile, the company trades at an attractive NTM (next 12 months) price-to-sales multiple of 0.8, making it an attractive buy.
Dollarama
Dollarama (TSX:DOL) is another excellent stock to add to your portfolio in this high-interest rate environment. The company sells various consumables, general merchandise, and seasonal products at attractive prices. Given its extensive presence with 1,507 stores, the company has 80% of the Canadian population within 10 kilometres of its store. With inflation creating deeper holes in consumers’ pockets, the company’s value proposition and affordable product mix are attracting more customers.
In the April-ending quarter, Dollarama’s topline grew by 20.7%. Same-store sales growth of 17.1% and the net addition of 76 stores over the last 12 months drove the company’s sales. A 15.5% growth in its transactions and a 1.4% increase in its average ticket size drove the company’s same-store sales. The company witnessed strong sales across product categories during the quarter.
Dollarama also posted solid net income of $179.9 million during the quarter, representing a 23.6% growth from the previous year’s quarter. Further, it generated an EBITDA (earnings before interest, tax, depreciation, and amortization) of $366.3 million during the quarter, with an EBITDA margin of 28.3%. The company closed the quarter with an available liquidity of $1.3 billion. So, it is well-equipped to fund its growth initiatives.
Meanwhile, Dollarama plans to increase its store count to 2,000 by 2031 by adding 60–70 stores annually. Further, it is strengthening its direct procurement capabilities and improving logistics efficiency, which could boost its financials in the coming years. So, I am bullish on Dollarama despite rising interest rates.
