Better Defensive Stock: Fortis or Waste Connections?

Waste Connections would be an excellent addition to your portfolio due to its solid underlying business and healthy growth prospects.

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The equity markets have been on an upward momentum trend over the last six months, with the S&P/TSX Composite Index rising 11.8% since the beginning of October. The improving macro environment and strong quarterly performances have improved investors’ sentiments, driving the equity markets. However, the impacts of prolonged higher interest rates and ongoing geopolitical tensions are causes of concern.

Given these uncertainties, investors should add defensive stocks to stabilize their portfolios. Defensive stocks are less susceptible to economic cycles and thus deliver stable returns irrespective of the broader macro environment. Now, let’s assess Fortis (TSX:FTS) and Waste Connections (TSX:WCN) to decide which defensive stock to buy right now.

Fortis

Fortis is an electric and natural gas utility company that serves around 3.5 million customers across North America. Supported by its 10 regulated utility assets, the company has generated stable and predictable cash flows irrespective of the broader market conditions. Supported by these stable financials, Fortis has delivered an average total shareholders’ return of over 10% for the last 20 years and has also rewarded its shareholders by raising dividends for 50 years.

Meanwhile, the company has planned to invest $25 billion from 2024 to 2028, growing its rate base at an annualized rate of 6.3% to $49.8 billion by 2028. It expects to generate 55% of the funds from its operations, 11% from issuing additional shares, and 34% from debt. The expanding rate base could drive its financials. So, the company is well-equipped to maintain its dividend growth. Management hopes to grow the dividend by 4 to 6% annually over the next five years.

However, Fortis has been under pressure over the last 10 months due to rising interest rates. Given its capital-intensive business, rising interest rates have hurt its margins, thus dragging its stock price down. The company has lost over 13% of its stock value compared to its 52-week high. Amid the sell-off, its valuation looks attractive, with its price-to-book and NTM (next 12 months) price-to-sales multiples at 1.3 and 2.2, respectively.

Waste Connections

Waste Connections is a solid waste management company with a strong presence in the United States and Canada. It operates in exclusive and secondary markets and faces less competition, thus allowing it to enjoy higher margins. Besides, its integrated operations and aggressive expansion through strategic acquisitions have driven its financials and stock price. Over the last 10 years, the company has returned over 580% at a 21.1% compound annual growth rate (CAGR).

 In 2023, the Toronto-based company generated $8 billion of revenue, representing 11.2% growth from the previous year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew 13.6%, while its adjusted EBITDA margin expanded by 70 basis points to 31.5%. Given its continued acquisitions and solid operating performance, the company’s financial uptrend will continue this year. Last month, it acquired 30 waste treatment and disposal facilities for $1.8 billion.

Boosted by these acquisitions, WCN’s management expects its adjusted EBITDA to grow 13% this year, while its adjusted EBITDA margin could expand by 120 basis points to 32.7%. Besides, the company’s management has also stated that the higher value for the recovered commodity prices and easing inflationary pressure could provide further upside. So, its outlook looks healthy.

Amid its solid performance and healthy growth prospects, WCN’s stock price is up 17% this year and trading close to its all-time high. The increase in stock price has raised its valuation, with the stock currently trading at five times its projected sales and 35.6 times projected earnings for the next four quarters. Given its healthy growth prospects and solid underlying business, I believe its valuation is justified.

Investors’ takeaway

Both stocks are an excellent addition to your portfolios due to their solid underlying businesses and healthy growth prospects. However, I am more bullish on WCN due to its higher growth prospects and a higher interest rate environment.

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 Rajiv Nanjapla has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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