The Canadian equity markets continue to be under pressure, with the S&P/TSX Composite Index falling 6.3% from its recent highs. Amid the trade war escalation, investors fear a global economic slowdown, leading to a pullback in the equity markets. Moreover, I expect the volatility in the equity markets to continue in the near term. Given the uncertain outlook, investors should look to buy defensive stocks to shield their portfolios in this volatile environment.
Image source: Getty Images
Fortis
Fortis (TSX: FTS) is an excellent defensive stock to have in your portfolio due to its low-risk transmission and distribution business and regulated assets. The company’s 10 regulated utility assets meet the electric and natural gas needs of 3.5 million customers, thus generating reliable and predictable financials, irrespective of the broader market conditions. Supported by these solid cash flows, the company has raised its dividends for the previous 51 years and currently offers a forward dividend yield of 3.84%. It has also delivered an average total shareholders return of 10.3% for the last 20 years, outperforming the broader equity markets.
Moreover, Fortis is expanding its asset base with a five-year capital investment plan. The $26 billion capital investment plan would grow its rate base at a 6.5% CAGR (compound annual growth rate) to $53 billion by 2029. The company expects to generate around 70% of the investment from the cash generated from its operations and dividend-reinvestment plan. So, these investments would not substantially raise its debt. Further, the Bank of Canada has cut interest rates six times in a row to lower its benchmark interest rates to 3%. Falling interest rates could benefit Fortis, which operates a capital-intensive utility business. Also, given its strong presence in the United States, the weakening of the Canadian dollar against the United States Dollar could benefit Fortis.
Dollarama
Dollarama (TSX: DOL) is another top defensive stock I am bullish on due to its solid underlying business. It operates 1,601 stores across Canada, with 85% of the population having at least one store in a 10-kilometer radius. Its superior direct-sourcing model and efficient logistics allow it to offer various consumer products at attractive prices, thus enjoying healthy same-store sales even during a challenging macro environment. Supported by these solid same-store sales, the company has grown its top and bottom lines at an annualized rate of 11.1% and 17.4% since fiscal 2011, respectively.
Moreover, the Montreal-based discount retailer continues to expand its footprint and hopes to raise its store count to 2,200 by fiscal 2034. Also, it is strengthening its presence in Latin America through its 60.1% stake in Dollarcity, which operates 588 stores. Dollarcity also plans to increase its store count to 1,050 by fiscal 2031. Also, Dollarama can increase its stake in Dollarcity to 70% by exercising its option within 2027. Given these healthy growth prospects and solid underlying business, I expect Dollarama to continue delivering solid financials in the coming quarters, thus supporting its stock price growth.
Waste Connections
Waste Connections (TSX: WCN) collects, transfers, and disposes of solid wastes. It operates in 46 states in the United States and six Canadian provinces, generating around 86% of the revenue from the United States business and the remaining 14% from Canada. With its operations primarily focused on exclusive or secondary markets, it faces lesser competition and enjoys higher operating margins.
Further, the company has been expanding its footprint through organic growth and strategic acquisitions, thus driving its financials and stock price growth. Over the last 10 years, the Toronto-based waste management company has delivered over 490% returns at an annualized rate of 19.4%. Moreover, the company is investing in renewable natural gas and resource recovery facilities and continuing with acquisitions, which could support its financial growth in the coming quarters. Further, the adoption of technological advancements and falling employee turnover amid improving employee engagement and retention could support its margin expansion. Considering all these factors, I believe WCN would be an ideal buy in this uncertain outlook.
