The Canadian benchmark index rose more than 18% last year. Easing inflation, interest rate cuts by the Bank of Canada, and solid quarterly performances boosted the equity market. Although the TSX Index is up 1.3% this year, there are uncertainties surrounding the imposition of tariffs on imports by the United States and the slowdown in monetary easing initiatives by the U.S. Federal Reserve. In this uncertain outlook, I believe these three Canadian stocks would be worthy additions to your portfolio.
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Hydro One
Hydro One (TSX:H) is an electric utility company that serves approximately 1.5 million customers in Ontario. With 99% of its business regulated and no material exposure to commodity price fluctuations, its financials are less prone to market volatility. Meanwhile, the regulated electric utility company has grown its rate base at an annualized rate of 5% since 2018. It has also adopted several cost-cutting initiatives, improving its operating efficiency and boosting its financials.
Supported by these solid financials, Hydro One has returned around 107% in the last five years at an annualized rate of 15.7%. Also, it has raised its dividends at an annualized rate of 5% since 2016.
Moreover, the company is continuing with its $11.8 billion capital expenditure plan, which would grow its rate base at a 6% CAGR (compound annual growth rate) through 2027. Amid these investments and improving operating efficiencies, the company’s management expects its EPS (earnings per share) to grow 5–7% annually over the next three years. The financial growth could support its future dividend payouts, with the company’s management expecting to raise its dividends at an annualized rate of 6% through 2027. Considering all these factors and its reasonable NTM (next 12 months) price-to-earnings multiple of 24.1, I am bullish on Hydro One.
Dollarama
My second pick would be Dollarama (TSX:DOL), which offers a wide range of consumer products at attractive prices, thus enjoying healthy footfalls even during a challenging macro environment. Its superior direct-sourcing model and effective logistics allow it to offer consumer products at attractive prices. Besides, the retailer has planned to open around 600 stores over the next nine years to increase its store count to 2,200 by the end of fiscal 2034. Given its capital-efficient business model and quick sales ramp-up, these expansions could boost its top and bottom lines.
Moreover, Dollarama owns a 60.1% stake in Dollarcity, which operates 588 discount retail stores in Latin America. Also, Dollarama can increase its stake by 9.9% in Dollarcity by exercising its option on or before December 31, 2027. Further, Dollarcity is expanding its store network and expects to increase its store count to 1,050 by the end of 2031. So, its growth prospects look healthy. However, amid the recent pullback, the company is trading at a 9% discount compared to its 52-week high. So, investors could utilize this pullback to accumulate the stock and earn superior returns.
TC Energy
I have chosen a midstream energy company, TC Energy (TSX:TRP), which offers an attractive dividend yield of 5.6% as my final pick. With around 97% of its adjusted EBITDA generated from rate-regulated assets and take-or-pay contracts, its cash flows are stable and predictable, thus facilitating its dividend growth for 24 consecutive years.
After spinning off its liquids pipeline business in October, TC Energy focuses on natural gas infrastructure and power and energy solutions. Further, the energy firm has planned to make a capital investment of $6–7 billion annually, thus expanding its asset base. It also focuses on capital efficiency and cost optimization initiatives, which could generate cost savings of $2.5 billion between 2024 and 2027. Amid these initiatives, the company expects its adjusted EBITDA to grow by 5–7% annually through 2027 and hopes to raise its dividends by 3–5% annually. Also, its valuation looks reasonable with its NTM price-to-earnings multiple at 19, thus making it an excellent buy.
