Since economists are predictable a recession in Canada by 2024, prudent investors can consider stocks that are resilient in recessions. Here are two such stocks.
Fortis
As a regulated utility, Fortis (TSX:FTS) is able to make predictable returns on its investments. Its assets are also diversified across geography and jurisdiction. As well, it primarily has distribution and transmission assets that provide essential services through economic cycles.
One downside to all utilities right now is higher interest rates that have increased the cost of capital, made investments less attractive, and lowered their growth potential. After all, utilities naturally have high debt levels. Unlike some utilities whose credit ratings were cut, Fortis has defensively maintained its S&P credit rating of A- since 2007, which illustrates its prudence and quality.
Following its usual dividend hike schedule, Fortis just increased its dividend. The 4.4% dividend increase, although lower than its midpoint target of 5%, marks an incredible dividend-growth streak of half a century! Only one other TSX stock has achieved this feat.
At $55.08 per share, Fortis stock is fairly valued, trading at about 18.4 times adjusted earnings. Investors can expect stable growth from the utility’s capital plan of $25 billion from 2024 to 2028 that it expects to drive rate base growth at a compound annual growth rate (CAGR) of 6.3% and dividend growth of 4-6% per year.
At the recent quotation, the dividend stock offers a safe dividend yield of close to 4.3%. Assuming its valuation stays the same, investors can expect long-term total returns of about 9-10%, which is solid for a blue-chip stock.
Alimentation Couche-Tard
Unlike Fortis, Alimentation Couche-Tard (TSX:ATD) stock trades at close to its all-time high, which is an indication of the strength of the global convenience store and roadside fuel retailing business. Interestingly, analysts believe Couche-Tard is a cheaper stock than Fortis and that it trades at a discount of close to 13%. This is not a huge discount by any means, but if the company can continue its double-digit growth, it could be considered a good value on a forward basis.
In the past 10 fiscal years, Couche-Tard increased its adjusted earnings per share by 22.5%. This is an achievement for only the top TSX stocks! In the period, it also grew its dividend 10-fold at a CAGR of north of 25%. As well, the growth stock delivered amazing returns at a CAGR of north of 21%! In other words, it turned an initial investment of $10,000 into about $68,990 in 10 years.
Because of its large size, Couche-Tard has economies of scale that provide flexibility on its execution. The company is shifting more towards organic growth, which will take a weight of about 60% for its growth, although it continues to see mergers and acquisitions opportunities with a focus on the United States and Asia.
It has demonstrated strong organic growth in driving returns. From 2014 to 2023, its return on capital employed averaged 15.4%. Although Couche-Tard offers a small yield over the next five years, it has a good chance of outperforming the market.
