The Canadian equity markets have been on an upward momentum over the last few weeks, hitting new highs last week. The S&P/TSX Composite Index is up more than 19% compared to its April lows. Meanwhile, the rising geopolitical tensions amid the Israel-Iran conflict, as well as the expectation of a global economic slowdown due to protectionist policies, are causes of concern. Therefore, if you fear that the recent rally in the equity markets is overdone, then you should look to strengthen your portfolios with quality defensive stocks. Meanwhile, here are my three top picks.
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Fortis
Fortis (TSX: FTS) operates 10 low-risk and regulated utility assets, serving over 3.5 million customers across the United States, Canada, and the Caribbean. With 93% of its assets engaged in transmitting and distributing natural gas and electricity, the company’s financials are less prone to commodity price fluctuations and economic cycles. Moreover, the company’s expanding rate base and improving operating efficiency have boosted its financial performance, thereby supporting its stock price growth and consistent dividend increases.
Over the last 20 years, Fortis has delivered an average total shareholder return of 10.3%. Also, it has consistently raised its dividend for 51 years and currently offers a reasonable forward yield of 3.76%. Its valuation also looks attractive, with the company currently trading at 19.1 times analysts’ projected earnings estimates for the next four quarters.
Moreover, the company is expanding its rate base with its $26 billion capital investment plan. These investments would grow its rate base at an annualized rate of 6.5% to $53 billion by 2029. Meanwhile, it expects to generate around 70% of the funding from internal operations and dividend reinvestment plans, thereby avoiding a substantial increase in its leverage. Additionally, the company could also benefit from falling interest rates, thus making it an excellent buy.
Waste Connections
Another defensive stock I am bullish on is Waste Connections (TSX: WCN), which collects, transfers, and disposes of non-hazardous solid waste. It operates primarily in secondary and exclusive markets across the United States and Canada, thereby facing lesser competition and enjoying higher margins.
Additionally, the company has completed over 110 acquisitions since 2020, incurring $6.5 billion in outlays. These strategic acquisitions and solid organic growth have supported the company’s financial performance, contributing to its stock price growth. Over the last 10 years, the company has delivered a total shareholder return of more than 510% at an annualized rate of 19.8%.
Moreover, WCN is developing 12 renewable natural gas projects, which could contribute $200 million to its annualized adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). The company’s management anticipates that these facilities will become operational in 2026. Additionally, the company is predicting above-average merger and acquisition (M&A) activity this year, driven by its healthy cash flows and solid financial position. Considering these growth initiatives, I anticipate the uptrend in the company’s financials to continue, which should support its stock price growth.
Dollarama
Dollarama (TSX: DOL) is a discount retailer operating 1,638 stores across Canada. Its superior direct-sourcing business model and efficient logistics system have helped reduce its expenses, enabling it to offer a wide array of consumer products at competitive prices. Therefore, the company enjoys healthy same-store sales even during a challenging macroeconomic environment.
Last week, the Montreal-based retailer reported an impressive first-quarter performance, with its same-store sales growing by 4.9% amid a 3.7% increase in traffic and a 1.2% increase in average transaction size. It also opened 22 new stores during the quarter, raising its store count to 1,638. Supported by its healthy same-store sales growth and store network expansion, its revenue grew by 8.2%. Additionally, its diluted EPS (earnings per share) increased 27.3% to $0.98 while expanding its adjusted EBITDA margin by 290 basis points to 32.6%.
Moreover, Dollarama continues to expand its store count and is hopeful of reaching 2,200 stores by the end of 2034. Given its cost-effective and growth-oriented business model, these expansions could support both its top and bottom lines of growth. Furthermore, its subsidiary, Dollarcity, also expects to add around 400 stores over the next five years, increasing its store count to 1,050. Therefore, I hope the uptrend in Dollarama’s financials continues while driving its stock price growth.
