The escalating trade war has shaken investors’ confidence, dragging the equity markets down. The S&P/TSX Composite Index fell 6.5% from its all-time highs. Amid weakening investors’ confidence, investors should look to buy quality defensive stocks to sail through this uncertain outlook. Against this backdrop, let’s look at my three top defensive bets.
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Waste Connections
Waste Connections (TSX:WCN) is an excellent defensive stock to buy in this uncertain outlook due to the essential nature of its business, consistent financial growth, and impressive historical returns. The waste management company operates in the United States and Canada, with around 86% of revenue generated from the United States business and the remaining 14% from Canadian operations. It focuses primarily on secondary and exclusive markets, thus facing lesser competition and enjoying higher margins. Also, it has expanded its footprint through organic growth and acquisitions, driving its financials and stock price growth. Over the last 10 years, the company has posted 490% returns at an annualized rate of 19.4%.
Moreover, I expect the uptrend in WCN’s financials to continue amid organic and inorganic growth. It is progressing with the development of renewable natural gas and resource recovery facilities, and continues to focus on adopting technological advancements to improve operating efficiency and employee safety. Further, improved employee engagement has reduced employee turnovers, thus supporting its margin expansions. Amid these growth initiatives, the management projects its topline to grow by 6.8% this year. At the same time, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) could expand by 50–80 basis points. Considering all these factors, I believe WCN would be ideal for this volatile environment.
Hydro One
Hydro One (TSX:H) is a pure-play electric utility company that serves 1.5 million customers across Ontario. The company’s financials are less prone to challenging macro factors, with 99% regulated assets and no exposure to power production or commodity price fluctuations. Besides, the company’s growing rate base (at a 5% compound annual growth rate since 2018) and adoption of cost-cutting initiatives have boosted its financials, thus supporting its dividend growth. The electric utility company has increased its dividends at an annualized rate of 5% since 2016, while its forward dividend yield stands at 2.6% as of the March 13 closing price.
Moreover, the demand for electricity is rising, thus driving the demand for Hydro One’s services. Amid demand growth, the company continues to expand its rate base through its $11.8 billion capital expenditure plan, which would grow at an annualized rate of 6% through 2027. These rate base expansions could support its financial growth, thus facilitating its future dividend payouts.
Dollarama
Dollarama (TSX:DOL) is a discount retailer that operates 1,601 stores across Canada, with 85% of Canadians currently having at least one store within a 10-kilometre radius. Given its compelling value offerings, the company has enjoyed healthy footfalls even during challenging macro environments, thus supporting its sales growth. Also, its cost-effective, growth-oriented business model has supported its margin expansions. Since fiscal 2011, the Montreal-based retailer has grown its revenue at an annualized rate of 11.1% while its adjusted EBITDA margin has expanded from 16.5% to 32.6%.
Moreover, Dollarama continues expanding its store network and expects to reach a store count of 2,200 over the next nine years. Given its capital-efficient business model, lower maintenance expenditure, and quick sales ramp-up, these expansions could drive its top and bottom lines. Additionally, the company has established a strong presence in Latin America through a strategic investment of a 60.1% stake in Dollarcity. Dollarcity, which currently owns 588 stores, has planned to raise its store count to 1,050 by the end of fiscal 2031. Also, Dollarama can increase its stake in Dollarcity to 70% by exercising its option within 2027. Considering all these factors, I believe Dollarama could outperform in the coming quarters.
