Dollarama vs. Waste Connections: Which TSX Stock Is a Better Buy?

Let’s assess which among Dollarama and Waste Connections is a better buy amid this uncertain outlook.

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Although the United States’s Consumer Price Index showed signs of easing, the employment market remains robust, adding 272,000 jobs in May against an expected 185,000. So, the Federal Reserve has signaled only one rate cut this year against investors’ expectation of three cuts. Meanwhile, investors are worried that a prolonged high interest rate environment could hurt global growth, thus creating volatility in the equity market. The S&P/TSX Composite Index is down 2.1% this month.

In this volatile environment, let’s assess which of Dollarama (TSX:DOL) and Waste Connections (TSX:WCN) would be an excellent defensive stock to strengthen your portfolio.

Dollarama

Dollarama is a Canadian discount retailer with an extensive presence nationwide. It has adopted a direct sourcing model, giving it higher bargaining power while removing intermediatory expenses. Also, the company’s centralized logistics and distribution system allow it to offer various consumer products at attractive prices. So, the company has witnessed healthy same-store sales even during a challenging macro environment. Besides, it has expanded its store count from 652 in fiscal 2011 to 1,569 by the end of the first quarter of fiscal 2025, thus driving its financials.

Since 2011, Dollarama has grown its top line at an annualized rate of 11.5% while its net income has increased at a CAGR (compound annual growth rate) of 16.6%. Besides, its EBITDA (earnings before interest, tax, depreciation, and amortization) margin has increased from 16.5% to 32%. Further, the company has planned to grow its store count to 2,000 by fiscal 2031. Besides, it is expanding its digital footprint to enhance customer convenience, thus boosting its same-store sales.

Dollarma recently increased its stake in Dollarcity from 50.1% to 60.1%. Dollarcity also plans to add around 500 stores over the next six years. The expanding footprint and higher stakeholding could increase Dollarcity’s contribution to Dollarama. So, its growth prospects look healthy.

Meanwhile, Dollarama has been raising its dividends consistently since 2011, with its forward yield currently at 0.3%. With its NTM (next 12 months) price-to-earnings multiple at 29.9, its valuation looks expensive. However, its solid underlying business and healthy growth prospects justify its valuation.

Waste Connections

Waste Connections is North America’s third-largest solid waste management company, operating in secondary and exclusive markets across the United States and Canada. Along with organic growth, the company has expanded its footprint through strategic acquisitions. Since 2016, the company has acquired $12 billion of assets, driving its financials. In the last 10 years, the waste management company has returned over 600% at a CAGR of 21.6%, outperforming the broader equity markets.

Given its solid financial position and healthy cash flows, WCN continues to evaluate acquisition opportunities that will fit its strategy and create long-term value for its shareholders. Further, the company is developing several Renewable Natural Gas (RNG) and resource recovery facilities, with management expecting to put three into operation this year.

Bolstered by its solid cash flows, WCN’s management expects to return a higher percentage of its capital outlay to its shareholders through dividends and share repurchases. Meanwhile, the company has raised its dividends at an annualized rate of 14% since 2010, with its forward yield at 0.64%. Notably, WCN trades at an expensive valuation, with its NTM price-to-earnings multiple at 35.6.

Investors’ takeaway

Given the essential nature of their businesses and healthy growth potential, these two defensive companies are an excellent addition to your portfolio in this volatile environment. However, I am more bullish on Dollarama due to its higher growth prospects and relatively cheaper valuation.

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

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