Canada’s annual inflation declined to 2.9% in January compared to 3.4% in December, which was lower than analysts’ expectation of 3.3%. Amid signs of easing inflation and solid quarterly performances from prominent companies, the Canadian equity markets have witnessed healthy buying, with the S&P/TSX Composite Index rising 4.2% year to date.
However, analysts expect Canada’s inflation to rise to 3.1% in February. Further, a global slowdown this year amid a prolonged higher interest rate environment and rising geopolitical tensions could turn the equity markets volatile in the near term. So, investors can add defensive stocks to strengthen their portfolios and navigate this volatile environment safely.
Meanwhile, let’s assess which among Dollarama (TSX:DOL) and Alimentation Couche-Tard (TSX:ATD) would be a better stock to buy right now.
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Dollarama
Dollarama is a Canadian value retailer offering a wide range of products at attractive prices. The company expanded its store count from 652 in fiscal 2011 to 1,541 at the end of the third quarter of fiscal 2024, an annualized rate of over 68 stores per year. Its superior direct-sourcing model and efficient logistics have also allowed the company to offer products at attractive prices, thus driving its same-store sales.
Supported by its store network expansion and healthy same-store sales, the company has grown its sales and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) at 11.3% and 16.8%, respectively, since fiscal 2011. Amid these strong performances, the Montreal-based retailer has returned 640% over the previous 10 years at a 22.2% CAGR (compound annual growth rate). Amid the increases, it trades at NTM (next 12-month) price-to-sales and NTM price-to-earnings multiples of 4.8 and 31.6, respectively.
Meanwhile, the company has planned to increase its store count to 2,000 by fiscal 2031. An average investment of $920,000 for new stores and a payback period of two years have resulted in low capital intensity and high return on investment. So, the expansion could continue to drive its financials.
The company’s subsidiary, Dollarcity, where Dollarama owns a 50.1% stake, has planned to add 370 more stores by fiscal 2029. The expansion of the store network could increase Dollarcity’s contribution towards Dollarama. The company has also raised its dividend 12 times since 2011, with its forward yield at 0.27%.
Alimentation Couche-Tard
Alimentation Couche-Tard operates 16,700 convenience stores across 29 countries, with 13,100 offering transportation fuel. The Laval-based company has been growing its financials through aggressive acquisitions, thus driving its financials. Over the last 10 years, it has returned over 480% at an annualized rate of 19.3%. Despite these solid returns, the company trades at NTM price-to-sales and NTM price-to-earnings multiples of 0.7 and 18, respectively.
Meanwhile, the uptrend in ATD’s financials could continue. The company is well-positioned to strengthen its footprint in the highly fragmented U.S. retail market, where single stores account for 60% of the total. Given its scale, optimized supply chain, and effective development of private-label brands, the company could expand its market share.
ATD has also adopted “10 For The Win,” a five-year strategy to grow its adjusted EBITDA to reach $10 billion by fiscal 2028. Further, it acquired 2,175 European retail assets from TotalEnergies earlier this year. The company, which had announced the construction of 500 new stores over the next five years, has already opened 40 stores as of September 30, 2023. Considering all these factors, I believe the company’s growth prospects look healthy. Although ATD’s dividend yield stands at 0.87%, it has raised its dividend at an annualized rate of 27% since 2013, which is encouraging.
Investors’ takeaway
Since the beginning of 2023, Dollarama and ATD have returned 32.9% and 37.1%, respectively, outperforming the broader equity market. The uptrend in both stocks could continue as investors look to add defensive stocks to strengthen their portfolios amid a volatile environment. Meanwhile, I am more bullish on ATD due to its cheaper valuation and growth initiatives.
