Alimentation Couche-Tard (TSX:ATD) and Dollarama (TSX:DOL) are both resilient retailers that are defensive even during bad economic times. Let’s compare the two to see which may be a better buy today.
Businesses
Couche-Tard has more than 14,000 convenience stores in its global network that spans 25 countries. Many of its locations also offer road transportation fuel, which encourages foot traffic. About 65% of its transactions are convenience only, about 25% are fuel only, and about 10% are a mix of both, as noted in its fiscal second quarter 2024 investor presentation.
The company has had strong growth over the decades, primarily fueled by strategic mergers and acquisitions (M&A). Management is smart and prudent in making fitting acquisitions and paying down debt rapidly every time. Couche-Tard is absolutely focused on growing earnings, reinvesting in the company, and generating strong cash flow.
Dollarama is a dollar store that essentially has a monopoly in Canada. Its price points are low, with its merchandise sold at select prices up to $5, such that it caters to consumers who are shopping for value. (Who doesn’t?) Additionally, it owns a 50.1% interest in Dollarcity, a growing Latin American value retailer.
Earnings quality
Both companies earn good earnings that are at least recession-resilient. However, one could say Dollarama is a better business (and makes more quality earnings) because it doesn’t depend a good portion of its growth on an M&A strategy. Dollarama also enjoys higher margins.
Couche-Tard has reduced its reliance on M&A, but it still counts on M&A activities to fuel half of its growth. That said, when Couche-Tard makes a meaningful acquisition, the market takes notice, and the stock tends to have the price momentum to head higher because of its fabulous track record of creating shareholder value from M&A.
Valuation and dividend growth
At about $81 per share at writing, Couche-Tard trades at a price-to-earnings ratio (P/E) of about 18.9. At the recent price of approximately $100, Dollarama trades at about 29 times earnings. These are premium multiples, but analysts believe the stocks are fairly valued.
These growth stocks tend to command premium multiples because of their wonderful businesses and excellent management execution. Consequently, both stocks tend to trend higher over time.
Although their dividend yields are small — 0.86% for Couche-Tard and 0.28% for Dollarama at writing — they could deliver above-average total returns in the long run. For your reference, over the last 10 years, the Canadian stock market, Couche-Tard stock, and Dollarama stock delivered total returns of about 7.9%, 19.9%, and 22.6%, respectively. In the same period, Couche-Tard’s dividend-growth rate was 26.6%, while Dollarama’s was 11.7%.
XIU, ATD, and DOL three-year Total Return Level data by YCharts
Investing takeaway
It’s difficult to choose between Alimentation Couche-Tard stock and Dollarama stock today. In the long run, Dollarama stock has outperformed Couche-Tard. However, over the last one- and three-year periods, their total returns have been roughly in alignment. The chart above displays results over the last three years on an initial investment of $10,000.
Besides, both stocks appear to be fairly valued today. Long-term investors should do well buying shares here. Investors shopping for greater value should capture market dips to buy shares.
