As per the survey conducted by the NABE (National Association of Business Economics), panellists predict the United States’ economic growth will slow down to 1% between the fourth quarter of 2023 and the fourth quarter of 2024. The slowdown could create volatility in the equity markets. So, investors could add quality defensive stocks to strengthen their portfolios.
The financials of retailers are not susceptible to market volatility due to the essential nature of their business, thus making them excellent defensive stocks to have in your portfolios.
Meanwhile, let’s assess which among Dollarama (TSX: DOL) and Alimentation Couche-Tard (TSX: ATD) would be an excellent buy right now.
Dollarama
Dollarama owns and operates 1,541 stores across Canada, offering various everyday products at low prices. Supported by its direct sourcing capabilities and efficient logistics, the company is able to provide its products at a compelling value, thus delivering consistent financial growth over the last few years. Since 2011, the company has grown its revenue and net income at an impressive annualized rate of 11% and 16.9%, respectively. Supported by these solid financials, the company has returned over 610% in the last 10 years at an annualized rate of 21.7%.
Meanwhile, given its network expansion plans and solid same-store sales growth, I expect the uptrend in the company’s financials to continue. The discount retailer plans to increase its store count to 2,000 by 2031. Dollarcity, where the company owns a 50.1% stake, has intended to increase its store count to 850 by 2029, representing a net addition of 370 stores. Additionally, Dollarama’s capital-efficient business model, with quick sales ramp-up and a payback period of less than two years, could continue to drive its financials in the coming years. So, the company’s growth prospects look healthy.
Besides, Dollarama has been raising its dividend consistently since 2011, with its forward yield at 0.31%. Meanwhile, the company trades at a higher valuation, with its NTM (next 12-month) price-to-sales and NTM price-to-earnings multiples at 4.4 and 26.6, respectively. Given its solid track record and high-growth prospects, investors are ready to pay a premium.
Alimentation Couche-Tard
Alimentation Couche-Tard operates around 14,425 convenience stores under Couche-Tard, Circle K, and Ingo brands across 25 countries. Of these stores, around 10,800 offer road transportation fuel. Over the last 10 years, the company has grown its EBITDA (earnings before interest, tax, depreciation, and amortization) and net earnings at a CAGR (compound annual growth rate) of 15.4% and 18.4%, respectively. Supported by solid financials, the company has delivered impressive returns of around 500% over the last 10 years at a CAGR (compound annual growth rate) of 19.6%.
Meanwhile, ATD continues with its “10 For The Win” — a five-year strategy to grow its EBITDA to $10 billion by fiscal 2028 from $5.8 billion in fiscal 2023. It is focusing on both organic growth and strategic acquisition to drive growth. The United States retail market is highly fragmented, with 60% independent stores. Given its scale, optimized supply chain, and effective development of private-label brands, the company could strengthen its position in the market.
Further, the company has rewarded its shareholders by raising its dividend 10 times since 2013 at an annualized rate of over 27%. Its forward yield currently stands at 0.94%. Despite the strong returns over the last 10 years, the company still trades at a reasonable valuation, with its NTM price-to-sales and NTM price-to-earnings multiples at 0.7 and 17.3, respectively.
Investors’ takeaway
Both companies have consistently rewarded their shareholders with impressive returns over the last 10 years. Also, they offer solid near- to medium-term growth prospects. Meanwhile, I am more bullish on ATD due to its multiple growth drivers and cheaper valuation.
