Better Buy: Dollarama or Canadian Tire Stock?

Dollarama and Canadian Tire are iconic Canadian retails stocks. Which stock is the better value for a long-term investment?

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Dollarama (TSX:DOL) and Canadian Tire (TSX:CTC.A) are two iconic retail brands in Canada. Both provide a bit of everything for everyday life. Each stock has a drastically different price point, strategy, and track record on returns. Here’s why one stock may be a better long-term buy than the other.

Two retail stocks with very different strategies

Dollarama has become the leading dollar value store in Canada. While it really only has a few items below a dollar these days, it takes brand name household products and sells them at seemingly attractive price points. A customer steps into the store for one item and often comes out with a basketful.

The key to its success is that it can earn higher margins than an average retailer. While it marks products below most competitor prices, customers don’t realize that the product may have 20-40% less volume beneath the packaging.

Rather than owning large box stores, it operates many local, easy-to-access storefronts. By getting closer to the everyday consumer, it becomes customers first and most convenient stop for everyday essentials.

Canadian Tire is almost the opposite to Dollarama. It operates a large box store that offers everything from party supplies to lawnmowers to outdoor gear to kitchen cutlery.

Not to forget that it also owns several clothing brands, an outdoors and sporting outfitter, party supply stores, car repair shops, a financial services division, and a large stake in a major Canadian real estate investment trust.

The company is diversified. However, its product mix is a combination of pricier one-time items and daily essentials. As a result, its business is certainly more cyclical and economically sensitive.

Track record of returns

Dollarama has delivered exceptional returns. In fact, it is one of the best stocks in Canada over the past decade. DOL has delivered a 600% total return. That equates to a 21% compounded annual growth rate (CAGR). It pays a menial dividend worth a yield of 0.27%.

Returns have come from compounding cash into expanding its store count and growing its brand across Canada and South America.

Canadian Tire’s returns have been very different. Over the decade, it has delivered an 86% total return. That equates to a 6.4% CAGR. Take out the dividend and its capital returns get cut in half. Essentially, the stock has only increased with inflation, leaving you with a neutral return before the dividend. Today, Canadian Tire stock yields 4.9%.

Dollarama or Canadian Tire stock?

Dollarama has perpetually been an expensive stock. It trades for 32 times earnings! However, it has compounded earnings per share by 12% over the past five years.

Its business of essential goods provides a stable and growing earnings stream. The discount store operator continues to add more stores, so the valuation is somewhat justified by its growth prospects.

Canadian Tire stock trades for less than half the valuation of Dollarama at 14 times earnings. However, earnings per share growth is actually a -1.5% CAGR over the past five years.

Canadian Tire’s business is significantly more economically sensitive. Likewise, its multiple investments in brands do not appear to have created any real accretive shareholder value.

The Foolish takeaway

While Dollarama is by far the more expensive stock, it would probably be my choice over Canadian Tire. It not only is growing faster, but it appears to be much more economically resilient. Canadian Tire is more cyclical, so it may be a decent near-term trade based on its cheap value. However, for a long-term stock to buy and hold for years, Dollarama is the better bet.

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 Robin Brown 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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