Better Buy: Dollarama or Canadian Tire Stock?

Let’s examine whether Dollarama or Canadian Tire has the potential to deliver higher returns.

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The macroeconomic uncertainty and the elevated interest rate environment keep the stock market volatile. Thus, adding a few well-known consumer-focused stocks to your portfolio could add stability and growth. While the TSX has several consumer-focused stocks, I’ll restrict myself to retail companies like Dollarama (TSX:DOL) and Canadian Tire (TSX:CTC.A). 

Both these companies have a strong presence in Canada and sell a wide variety of products. Moreover, they focus on enhancing shareholders’ returns through share repurchases and dividend payouts. With this background, let’s examine which of these fundamentally strong Canadian stocks could deliver higher returns.  

Is Dollarama a dependable stock?

Dollarama is a solid stock for investors seeking growth and income. The company’s defensive business model and ability to grow earnings regardless of market conditions supports its stock price. Further, its growing earnings base enables it to enhance its shareholders’ returns through higher dividend payments.

Dollarama offers a wide range of products at multiple low fixed-price points. Thus, it is a go-to place for consumers seeking value. Higher traffic, direct sourcing capabilities, and its focus on driving efficiency have led the company to deliver double-digit sales and earnings growth over the past several years. Notably, Dollarama’s top line has increased by over 20% in the initial six months of fiscal 2023, while its earnings per share (EPS) registered a growth of 28.4% during the same period. 

Thanks to its double-digit growth rate, Dollarama stock has grown at a compound annual growth rate of nearly 20% in the past five years, beating the benchmark index by a wide margin. Further, Dollarama stock is up about 21% year to date.

Looking ahead, Dollarama’s strong brand recognition, value proposition, broad customer base, capital-efficient business model, and growing store base position it well to deliver solid growth in the coming years. Additionally, Dollarama consistently raises its annual dividend and has plans to sustain this growth in the future without interruptions.

Is Canadian Tire stock worth buying now? 

Canadian Tire operates a vast retail network of approximately 1,700 stores across Canada, offering a wide range of products, including home goods, apparel, footwear, automotive parts, sporting equipment, accessories, and fuel. Moreover, it has a Financial Services division and a real estate investment trust.

While Canadian Tire’s broad product offerings position it well to deliver solid growth, the persistently high interest rate environment dampened consumer demand for non-essential goods. Consequently, in light of the challenging macroeconomic landscape and constrained consumer spending, Canadian Tire’s management has retracted its medium-term projections. Canadian Tire’s management no longer expects average annual comparable sales growth of 4% through 2025. 

Furthermore, the company had initially projected its EPS to reach $26 by 2025. But, due to the elevated interest rates and inventory-related challenges, these expectations, as presented during its Investor Day event in March 2022, are no longer feasible.

Overall, Canadian Tire will likely face challenges in growing its top and bottom lines in the coming years, which could limit the upside potential of its stock. 

Bottom line

Dollarama and Canadian Tire are popular consumer-focused brands in Canada. However, Dollarama’s ability to deliver solid growth in all market conditions provides it an edge over Canadian Tire. Moreover, Dollarama stock has consistently outperformed the broader markets, which makes it a compelling investment. 

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 Sneha Nahata has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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