The stock market has been in free fall, as Donald Trump’s tariffs on Canada continue to ratchet up. For Canadian investors, that has meant a world of pain, even for many of what most investors would consider to be more defensive value stocks in this current environment.
Dollarama (TSX: DOL) and Canadian Tire (TSX: CTC.A) are two top Canadian retailers which many investors look to for portfolio stability. But in this current environment, the question is which may be a better buy or if investors would do better to consider other stocks altogether.
Let’s dive into that question and what each company brings to the table.
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Dollarama
Dollarama is the leading Canadian discount retailer, with an incredible footprint of more than 1,400 locations across the country.
The discount retailer has grown to its massive size organically, and also via acquisition over time. As a play on the lower to mid-end consumer, Dollarama stock has actually outperformed most Canadian stocks. Indeed, the company’s chart above tells an investor really everything they need to know about how the company is positioned, and the demand for Dollarama’s shares.
In my view, the company’s valuation is starting to look a bit stretched (at 36 times earnings, compared to less than 10 times for Canadian Tire). However, this company is a much more robust play on the lower-income consumer. And with more Canadians potentially entering this group in the coming years, if recession fears do play out, there’s reason to believe the company’s outsized growth (relative to its peers) could continue.
That’s the main reason why this retailer is getting the premium multiple it is in this market. It’s warranted.
Canadian Tire
Canadian Tire has a bit of a different stock chart (shown below). Over the past five years, this is a retailer that’s seemingly trodden water. However, it’s also worth noting that Canadian Tire carries with it a dividend yield of nearly 5%. That’s attractive, particularly for investors looking for income in this declining interest rate environment.
From a dividend perspective, I think there’s a lot to like about Canadian Tire right here. The company has been among the most consistent dividend growth stocks on the TSX and has also provided an incredible amount of capital appreciation over the very long term.
This lower valuation likely has something to do with Canadian Tire’s clientele, which is more mid-range overall. Providing an abundance of goods across various categories, the company benefits from broader economic growth. The thing is, we’ve seen growth slow in recent quarters, and there happen to be a plethora of Canadian stocks with similar dividend yields. Thus, demand for the company’s shares doesn’t appear to be as robust.
The verdict
Overall, I think the discussion around Canadian Tire in comparison to Dollarama really depends on an individual investor’s profile. For those seeking income with some long-term capital appreciation upside, Canadian Tire may be the better pick. But for those looking for a much more defensive position in the market with greater capital appreciation upside over the long term, Dollarama could be the best option.
In this current environment, I’d be more likely to side with Dollarama here. That’s mostly because it’s my view that the economy is likely to deteriorate further. In that environment, DOL stock could be a winner, at least compared to its peers.
