Despite the volatile last few days, the S&P/TSX Composite Index ended October 0.7% higher and is up 15.6% this year. Meanwhile, the Bureau of Labor Statistics reported on Friday that nonfarm payrolls in the United States increased by 12,000 last month, the lowest since late 2020. Investors looked less concerned as hurricanes and a Boeing strike were the primary reasons behind the dismal data. The unemployment rate for the month stood at 4.1%, which was in line with analysts’ expectations.
Meanwhile, the ongoing geopolitical tensions, rising bond yields, and Presidential elections in the United States have created an uncertain environment. Against this backdrop, I believe defensive stocks, which can stabilize your portfolios, would be excellent buys. Here are my two top picks.
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Waste Connections
Waste Connections (TSX:WCN) would be an excellent defensive bet due to its solid, underlying business. It collects, transfers, and disposes of non-hazardous solid wastes in secondary and exclusive markets across the United States and Canada. It has expanded its footprint through organic growth and strategic acquisitions, thus driving its financials and stock price. Over the last 10 years, the company has returned over 485% in the previous 10 years at an annualized rate of 19.4%.
Meanwhile, WCN’s management expects the acquisitions completed this year to contribute $700 million to its 2024 revenue. The rollover from these acquisitions will contribute 2% to its 2025 revenue. Further, the management hopes its solid employee engagement and retention initiatives could expand its operating margins next year. Amid these growth initiatives, the management projects its topline to grow in the mid-to-high single digits. Also, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) could expand in the high single digits. These projections exclude the company’s future acquisitions. Given its solid underlying business and healthy growth prospects, I am bullish on WCN despite the uncertain outlook.
Hydro One
Hydro One (TSX:H) is an electric power transmission and distribution company with no substantial exposure to commodity price fluctuations. With around 99% of its businesses rate regulated, the electric utility company generates stable and predictable cash flows, irrespective of market conditions. Meanwhile, the company has been expanding its rate base at an annualized rate of 5% since 2018 while generating $1.5 billion of productivity savings since going public in 2016. Supported by these healthy growth initiatives, the company has returned over 115% in the last five years at a 16.6% CAGR (compound annual growth rate).
Moreover, Hydro One is continuing its $11.8 billion capital investment plan, which will expand until 2027. These investments would grow its rate base at an annualized rate of 6% to $31.8 billion by 2027. The rate base expansion, increased tariffs, and improved operating efficiencies could boost its financials in the coming years. The company’s management expects its adjusted EPS to grow by 5-7% annually. Amid these growth initiatives, the company is confident of increasing its dividends by 6% annually for the next three years. It currently pays a quarterly dividend of $0.3142/share, translating into a forward yield of 2.81%. Besides, its valuation looks healthy, with H stock currently trading at 24 times analysts’ projected earnings for the next four quarters.
