The Number 1 Defensive Stock for Your TFSA

Alimentation Couche-Tard Inc (TSX:ATD.A)(TSX:ATD.B) stock combines cannabis investment with the safety of consumer defensive retail.

| More on:

A significant earnings event is about to happen. The safest cannabis stock, Alimentation Couche-Tard (TSX:ATD.A)(TSX:ATD.B), will announce first-quarter results for the fiscal year 2020 after the market closes today.

Alimentation Couche-Tard announced a partnership with Canopy Growth to open a licensed medical marijuana dispensary in Ontario in February 2019. The agreement allows Alimentation to sell legal cannabis through Canopy Growth’s Tweed brand.

Alimentation Couche-Tard operates globally through recognizable convenience store brands such as Couche-Tard, Circle K, Ingo, and Topaz. Although Alimentation is in a low-margin industry, retail, the company generates more revenue than any other Canadian company on the Toronto Stock Exchange.

Tax-Free Savings Account (TFSA) investors can prepare their portfolios for the upcoming recession with stock in Alimentation Couche-Tard. Not only is the stock a safe, defensive consumer retail position, but it is also an investment in profitable marijuana legalization. Even risk-conscious investors can appreciate the high growth of a volatile industry along with a dividend yield of 0.60% through shares of Alimentation.

Alimentation faces very little competition

Alimentation is a dominant player on the TSX and a company of national interest to the Canadian government, making the stock a relatively safe investment. Earlier this year, the Alcohol and Gaming Commission of Ontario (AGCO) issued the first 25 medical cannabis licences via random lottery. Alimentation was one of this lottery’s lucky winners under the shell company 2674253 Ontario Inc.

Unlucky Canopy Growth did not win this lottery. In response, Canopy Growth partnered with Alimentation to sell under Canopy’s Tweed brand. In May, Canopy Growth and Alimentation opened the first Tweed brand store in Ontario.

Alimentation did not face much competition in this lottery. In fact, the window for applications was only open for five days. Moreover, the $75 application fee was a small addition to a $6,000 non-refundable fee. These requirements essentially forced out aspiring small business owners who did not hear about the lottery within the five-day window and could not secure $6,000 in that time frame.

Small business owners would have also needed to secure a small business loan of $50,000 within this small five-day window. Worse still, if unable to begin retail operations by April 30, 2019, these aspiring business owners faced a $25,000 fine. Essentially, the odds were stacked in favour of Alimentation and other large, established corporations.

The lesson for Canadian TFSA investors is that some stocks may be safe due to the company’s political clout. Regardless of fairness, Canadian investors can use this to their advantage by investing in powerful dividend issuers like Alimentation, as long as it does not interfere with personal values.

How will cannabis impact Alimentation’s bottom line?

Cannabis should boost Alimentation’s low-profit margin and improve shareholder value. Alimentation’s share price soared 33% in the past 12 months and will see further jumps after announcing the success of cannabis integration into its business model.

The stock’s current return on equity is a healthy 21.34%, but the company’s profit margin is a mere 3.10%. Quarterly earnings growth year over year is negative, reflecting the low-profit margin from convenience stores.

Because cannabis retail has a higher profit margin, Alimentation will begin to see rising margins and year-over-year earnings growth. TFSA investors should undoubtedly pay attention to this afternoon’s earnings results to see how cannabis impacts Alimentation’s low-profit margin and growth projections.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Debra Ray has no position in any of the stocks mentioned. Couche-Tard is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Perfect TFSA Stocks for Long-Term Growth

Two industry heavyweights are perfect stock holdings in a TFSA for long-term money growth.

Read more »

Make a choice, path to success, sign
Dividend Stocks

Is Fortis Stock a Buy for its Dividend Yield?

Fortis has increased the dividend for 51 consecutive years.

Read more »

Middle aged man drinks coffee
Dividend Stocks

Is Brookfield Stock a Buy, Sell, or Hold for 2025?

BAM stock recently jumped after beating earnings. But is it still a buy, or is it better to wait?

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

3 Top Canadian Utility Stocks to Buy in November

Are you looking for some top Canadian utility stocks to own? Here's a look at three must-have options for any…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Is First Capital REIT a Buy for its 4.8% Yield?

First Capital is a REIT that offers you a tasty dividend yield of 4.8%. Is this TSX dividend stock a…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

TFSA Passive Income: 3 Stocks to Buy and Never Sell

Stocks like Fortis Inc (TSX:FTS) are worth holding long term.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

Canadian Utility Stocks to Buy Now for Stable Returns

Given their regulated business, falling interest rates, and healthy growth prospects, these three Canadian utility stocks are ideal for earning…

Read more »

nuclear power plant
Dividend Stocks

The Best Canadian Stocks to Buy and Hold Forever in a TFSA

TFSA investors can buy and hold these Canadian stocks to generate above-average, tax-free returns over the next decade.

Read more »