After last week’s pullback amid fears of an escalating tariff war between the United States and China, the Canadian equity markets rebounded sharply, with the S&P/TSX Composite Index reaching a new high yesterday. Now, the index is trading 23.9% higher year-to-date. If you’re concerned about the sharp rise in Canadian equity markets and elevated valuations, here are three defensive Canadian stocks with strong financials and healthy growth prospects that can add stability to your portfolio.
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Hydro One
Hydro One (TSX: H) is a pure-play electric utility company, with 99% of its operations derived from rate-regulated businesses. It has minimal exposure to commodity price fluctuations, thereby delivering stable and reliable financials, irrespective of broader market conditions. The company has also expanded its rate base at an annualized rate of 5.1% since 2018, supporting its financial growth. Backed by this healthy and reliable performance, the company has delivered an over 103% return in the last five years at an annualized rate of 15.2%.
Meanwhile, electricity demand is increasing, driven by economic growth, the electrification of the transportation sector, and the expansion of power-intensive data centres to support the growing adoption of artificial intelligence. The rising electricity demand has expanded the addressable market for Hydro One. Meanwhile, the hydro producer is continuing with its three-year capital investment plan of $11.8 billion, which could grow its rate base to $32.1 billion by 2027. Amid these expansions, the management expects its adjusted EPS (earnings per share) to grow 6–8% annually through 2027. Also, the company, which currently offers a forward dividend yield of 2.6%, is confident of raising its dividend at an annualized rate of 6% through 2027. Considering all these factors, I believe Hydro One is a safe bet.
Dollarama
My second defensive pick would be Dollarama (TSX: DOL), which operates 1,665 discount stores across Canada and 395 stores in Australia. Supported by its efficient direct-sourcing model and streamlined logistics, the company has managed to offer a broad range of consumer products at competitive prices, thereby enjoying healthy sales irrespective of the macro environment. Along with these reliable sales, the expansion of its store network has boosted its financials, thereby delivering healthy returns of 516% over the last 10 years at an annualized rate of 19.9%.
Moreover, Dollarama continues to grow its store network and expects to increase its store count to 2,200 in Canada and 700 in Australia by 2034. Additionally, Dollarama also owns a 60.1% stake in Dollarcity, which operates 658 stores across five countries in Latin America. Meanwhile, Dollarcity aims to expand its store network to 1,050 locations by the end of 2031. Also, Dollarama can increase its share in Dollarcity to 70% by exercising its option by 2027. Therefore, I expect Dollarcity’s contribution to Dollarama’s net income to grow in the coming years.
Additionally, the discount retailer has also raised its dividend 14 times since 2011 and currently offers a forward dividend yield of 0.24%. Considering its solid underlying business and healthy growth prospects, I expect Dollarama to continue delivering healthy returns irrespective of the broader market conditions.
Waste Connections
Waste Connections (TSX: WCN), which offers solid waste management services, is my final pick. The company primarily operates in secondary and exclusive markets across the United States and Canada, enabling it to encounter less competition and maintain higher profit margins. Along with organic growth, it has expanded its business through strategic acquisitions. Over the previous five years, the company has completed over 100 acquisitions, contributing $2.2 billion to its annualized revenue.
Moreover, given its solid financial position and healthy free cash flows, WCN expects to continue with its acquisitions. It has a solid acquisition pipeline of private companies, which can contribute $5 billion to its annualized revenue. Additionally, the company is focusing on adopting technological innovations, strengthening safety standards, and enhancing employee engagement, which can drive profitability in the coming years. Also, WCN has raised its dividend in double digits for 14 consecutive years, while its forward dividend yield stands at 0.72%.
