Yesterday, the President of the United States, Donald Trump, confirmed that he is moving ahead with his proposed 25% tariffs on goods imported from Canada and Mexico starting today. In retaliation, the Canadian government announced it would immediately impose tariffs on $30 billion of goods imported from the United States. The Canadian government has also stated that it would impose additional tariffs on $125 billion worth of goods after a 21-day consultation period.
Investors are worried that the ongoing protectionist measures could hurt global growth. These fears led to a selloff yesterday, with the S&P/TSX Composite Index falling 1.54%. Given the uncertain outlook, investors could look to strengthen their portfolios with defensive stocks, such as retail stocks. Against this backdrop, let’s explore which among Dollarama (TSX:DOL) and Alimentation Couche-Tard (TSX:ATD) would be a better buy now.
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Dollarama
Dollarama operates around 1,601 stores across Canada, offering various consumer products at attractive prices. The company’s superior direct sourcing model and effective logistics allow it to offer products at attractive prices, thus posting healthy same-store sales even during challenging environments. Its consistent store network expansion and solid same-store sales have boosted its financials, increasing its stock price. Over the last 10 years, the company has returned 640% at an annualized rate of 22.2%.
Moreover, the Montreal-based retailer continues to expand its footprint and expects to operate 2,200 stores by the end of fiscal 2034. Given its low-cost operating model, quick sales ramp-up, and lower payback period, these expansions could boost its top and bottom lines. Further, Dollarama owns an option to increase its stake in Dollarcity, a Latin American retailer operating 588 stores, to 70% by the end of fiscal 2027. Dollarcity also has healthy expansion plans and hopes to increase its store count to 1,050 by the end of 2031. These growth initiatives could support Dollarama’s financial growth in the coming quarters.
Also, Dollarama has hiked its dividend 13 times since 2011, with its forward dividend yield currently at 0.3%. Amid its solid returns and healthy growth prospects, investors are ready to pay a premium, thus raising its valuation. It trades presently 34.1 times analysts’ projected earnings for the next four quarters.
Alimentation Couche-Tard
Alimentation Couche-Tard operates 16,861 stores across 31 countries. It has grown its revenue and adjusted earnings per share at an annualized rate of 6.2% and 15.2% for the last 10 years, respectively. Solid organic growth and aggressive expansion have boosted its financials. Supported by these solid financials, the company has returned 215% in the last 10 years at an annualized rate of 12.15%.
Meanwhile, the Laval-based convenience store operator has adopted several strategies to drive its top and bottom lines in the coming years. It is expanding its private-label product offerings through new product lines and category creations. Also, its focus on extending sustainable energy options, widening sourcing relationships, optimizing distribution, strengthening its loyalty program, and acquisitions could continue to support its financial growth in the coming years. Meanwhile, the company’s management projects its adjusted earnings before interest, taxes, depreciation, and amortization to reach $10 billion by the end of 2028, representing an annualized growth of 11.7% over the next four years. So, its growth prospects look healthy.
Moreover, ATD has rewarded its shareholders by raising its dividends at a 26% compound annual growth rate for the previous 10 years and currently offers a forward dividend yield of 0.20%. Its valuation also looks healthy, with the company trading 0.6 times analysts’ projected sales for the next four quarters and 16.6 times projected earnings for the next four quarters.
Investors takeaway
Amid the ongoing trade war, the U.S. dollar has strengthened against other currencies, including the Canadian dollar. With around 63% of its revenue coming from the United States, ATD could benefit from the strong USD. Also, given its cheaper valuation, I am more bullish on ATD.
