Dollarama vs. Alimentation Couche-Tard: Which Stock Fits a 10-Year TFSA?

Cheap products don’t always come with cheap shares. A retailer can be doing nearly everything right while investors pay so much for the privilege that the next decade has little room for surprises. For a 10-year Tax-Free Savings Account (TFSA), I’d want customers coming back, profits growing, and a purchase price reasonable enough that even normal business performance delivers a decent return. The favourite shop doesn’t automatically get my investment money.

DOL

Dollarama (TSX: DOL) earns from selling everyday items at low price points. Its sourcing scale and store network help it offer prices that attract customers watching their budgets. New Canadian stores, Latin American growth, and its Australian business give it places to expand beyond selling another basket at an existing location.

Canadian comparable-store sales rose 5.4% in its fiscal second quarter. That measures growth at established stores, helping separate stronger customer demand from sales added by opening or buying locations. For Dollarama, it says the existing business is still attracting spending while expansion adds another source of growth.

Diluted earnings rose 11.2% to $1.29 per share. The shareholder benefit is that profit attached to each share grew, even with Australia reducing the quarter’s result. The risk is that turning the Australian business into a stronger retailer takes longer or costs more than investors expect.

ATD

Alimentation Couche-Tard (TSX: ATD) operates convenience stores and fuel stations, including Circle K. It earns from merchandise and the margin on fuel sold, with acquisitions adding locations it can improve. A busy station is attractive, but the profit kept per litre and the spending inside the shop count more than a large fuel-sales number.

First-quarter adjusted earnings rose 15.4% to US$0.90 per share. That improvement gives the investment a current earnings argument alongside its longer acquisition record. Unlike Dollarama’s Canadian reporting, these earnings are in U.S. dollars, so directly comparing the two share-price-to-earnings amounts without conversion would be misleading.

Fuel margins can swing, consumers can trim purchases, and acquisitions can disappoint. I’d also want management to resist chasing a giant deal simply to get bigger. Couche-Tard earns its place by making stores more profitable and allocating cash well, which makes the price paid for the shares particularly relevant.

Consider the price

Current market-data estimates put Dollarama at roughly 39 times forward earnings, against about 18 times for Couche-Tard. Forward earnings are analysts’ estimates for future profit. Those multiples mean paying around $39 or $18 for each estimated dollar of annual earnings, with forecasts capable of being wrong.

Dollarama therefore asks for more than twice the price per expected earnings dollar. I’d need much stronger sustained growth to choose it at that gap. Even excellent profit growth can disappoint a shareholder if the market later decides the stock deserves a much lower multiple.

The dividends reinforce that these are growth purchases. Here are alternative $10,000 investments at recent closing prices, before fees, using current quarterly payments annualized.

Neither payment carries a retirement budget. I’d reinvest it and focus on earnings growth, with tax-free investment gains doing the heavier work if the businesses deliver. A $10,000 deposit still requires enough personal TFSA room, including unused room carried forward.

Bottom line

I’d choose Couche-Tard for the next 10-year TFSA purchase at these valuations. Dollarama could suit someone willing to pay more for its stronger Canadian retail momentum, but I’d wait for a better entry. Couche-Tard gives patient investors more room for an ordinary improvement in the business to become an attractive return, which is the sort of bargain I’d happily take home.