Ever since the onset of the pandemic, the global markets have surprised the world with a breakneck bull-run. The current state of equity markets is a far cry from the actual economic situation on the ground. However, swift stimulus measures from governments worldwide through money printing and other quantitative easing measures have propped up markets to record valuations. While it is impossible to say with certainty that we are in a bubble or if and when the bubble will burst, investors must hold a portion of their portfolio in defensive stocks.
Simply put, defensive stocks are companies that provide an essential non-cyclical service. However, this is not a thumb rule as companies in cyclical sectors outperform in the long run due to significant unbreachable competitive advantages. It is important to hold such stocks in one’s portfolio because their earnings and valuations are not too severely impacted by business cycles or market sentiment as their revenues are very stable. These stocks typically operate in power/energy, consumer staples, healthcare, utilities, telecom, etc.
Defensive companies have specific defining characteristics such as high barriers to entry to their sectors, brand value, pricing power, strong dividend history, etc. At the center of these qualities is a service that is essential and non-cyclical. For example, a major non-cyclical and essential service is the natural gas space. Natural gas producers and infrastructure providers enjoy consistent demand that natural gas is required for heating and cooking purposes year-round. Moreover, due to the resilience and predictability of their businesses, these companies usually trade at modest earnings multiples and can pay out substantial dividends.
Best Defensive TSX Stocks for Your Portfolio
However, increasing investment in disruptive technologies for legacy businesses such as power generation/energy and telecommunication means that defensive companies face a considerable threat of disruption. Thus, although defensive companies are long-term outperformers on a risk-adjusted basis, new-age technology companies are hands-down the biggest wealth creators of the last decade, and it pays to hold a balanced portfolio with an assortment of sectors and risk profiles.
In this article, we will look at the best defensive businesses in Canada –
Metro (TSE: MRU)
Sector – Consumer Staple Retail
Market Capitalisation – C$14.8 billion
P/E – 18.56
Dividend Yield – 1.65%
Metro is one of the country’s leading retailers that sell general-purpose products and pharmaceuticals, both non-cyclical and essential. The company has a massive geographic footprint across Canada, with nearly 1000 grocery stores and 648 pharmacies. Despite the lockdowns and effects of the pandemic, the company fared reasonably well in 2020, a testament to its stability.
In FY20, Metro reported revenue of C$17.99 billion (up 7.3% YoY), a net profit of C$796 million (up 11.5% YoY). In Q3’FY21, Metro reported revenues of C$5.71 billion (down 2% YoY, but up 9.4% YoY on FY19 levels) and a net profit of C$252.4 million (down 4.2% YoY). The lower sales this year were on account of rampant stockpiling due to the pandemic last year.
Fortis (TSE: FTS)
Sector – Utilities
Market Capitalisation – C$26.4 billion
P/E – 21.25
Dividend Yield – 3.61%
Fortis is one of North America’s largest natural gas and power utilities companies with operations in the US, the Caribbean, and Canada. The company owns assets in Arizona, Newfoundland, New York, British Columbia, etc. Fortis has a very stable business due to consistent demand for gas and power from heating/cooking requirements. The company benefits from high barriers to entry to the sector from the capital intensity and government regulation.
In FY20, Fortis reported C$8.94 billion (up 1.73% YoY) and a net profit of C$1.27 billion (down 26% YoY). In Q2’21, Fortis reported net earnings of C$253 million (down 7.6% YoY) and YTD earnings of C$608 million (up 3.75% YoY). The company also completed another milestone by announcing a dividend increase for the 48th consecutive time. In addition, the company is currently investing aggressively in renewable energy generation and transmission through its C$19.7 billion capital expenditure plan.
Park Lawn Corporation (TSE: PLC)
Sector – Deathcare and Funerals
Market Capitalisation – C$1.21 billion
P/E – 37.92
Dividend Yield – 1.27%
Park Lawn is one of North America’s largest death care companies with a vast geographic footprint of funeral homes and crematoriums. Deathcare is one of the most stable sectors to invest in due to an ageing population and a gradually rising death rate. Although people have started moving away from the higher-margin burial funerals, Park Lawn has a dominant presence in crematoriums. It is by far the biggest listed deathcare company in Canada and has grown spectacularly well over the years with a 5-year return of 124%.
In FY20, Park Lawn reported revenue of C$334 million (up 37% YoY) and net earnings of C$19.03 million (up 176% YoY). In Q2’21, the company reported strong performance metrics with revenues of C$88.43 million (up 8.5% YoY) and a net profit of C$7 million (up 7% YoY).
Toronto Dominion Bank (TSE: TD)
Sector – Banking
Market Capitalisation – C$155 billion
P/E – 10.06
Dividend Yield – 3.70%
Toronto Dominion is one of Canada’s oldest and most revered institutions that has been in business since the 1800s. Although banking is a cyclical sector due to its exposure to the company and economic cycles, institutions like TD enjoy reputational advantages that are second to none, especially since trust matters a lot in finance. TD also has a stellar dividend history that stretches north of 100 years, a testament to the defensive nature of its business. Although COVID took its toll on the bank, it has bounced back hard with an 18.67% gain this year.
For FY20, TD reported revenue of C$36.4 billion (down 4.29% YoY) and a net income of C$11.9 billion (up 1.95% YoY). In Q2’21, TD reported revenue of C$10.75 billion (up 26.8% YoY) and a net profit of C$3.55 billion (up 57.7% YoY). While revenues have rebounded well, the bulk of the bottom line growth came from the reversal of loan loss provisions made last year.
BCE (TSE: BCE)
Sector – Telecommunications
Market Capitalization – C$57.27 billion
P/E – 19.67
Dividend Yield – 5.53%
BCE is one of Canada’s largest telecommunications companies. Telecom is a very integral component of any defensive portfolio due to its increasing importance in the functioning of society. Consumers and corporations mainly use telecom for communications between people. Still, we are now moving into an era of ubiquitous computing with IoT (Internet of Things), where devices will communicate with themselves. This shift will lead to consistent demand for massive bandwidth and connectivity, directly driving companies like BCE.
In FY20, BCE reported revenue of C$22.8 billion (down 3.82% YoY) and a net profit of C$2.63 billion (down 17.46% YoY). In Q2’21, a revenue of C$5.71 billion (up 6.43% YoY) and a net profit of C$717 million (up 164.5% YoY).
Algonquin Power and Utilities (TSE: AQN)
Sector – Power and Utilities
Market Capitalization – C$11.52 billion
P/E – 13.21
Dividend Yield – 4.65%
Algonquin Power is the largest renewable energy distributor and producer in Canada. The company owns nearly C$18B in solar, wind, hydroelectric, natural gas, and power distribution. Apart from the fact that power and utility companies make great defensive stocks, Algonquin has the added advantage of very stable operating costs due to the stability of solar, wind, hydroelectric, etc. There are no inputs such as coal or natural gas. Further, the company has multi-year off-take agreements for nearly 80+% of its power generations, insulating it from price swings. Although Algonquin has plans to invest C$9.4 billion over the next five years in additional power and distribution capacity, it expects that earnings CAGR over the same period will be 8%-10%.
In FY20, Algonquin reported revenues of C$1.68B (up 3.12%) and a net income of C$782.4 million (up 47.39% YoY). Although in Q2’21, Algonquin posted revenue of C$527 million (up 53.5% YoY), a net profit of C$103 million (down 63% YoY), the drop in net income was due to one-time expenses.
Enbridge (TSE: ENB)
Sector – Energy Infrastructure
Market Capitalization – C$103.3 billion
P/E – 17.03
Dividend Yield – 6.61%
Enbridge is one of North America’s most prominent energy infrastructure companies. The company mainly owns crude oil/natural gas pipelines and natural gas storage/processing facilities. The company benefits from high barriers to entry from high capital requirements and tight government regulation. Another reason that makes it an excellent defensive stock is the sustained demand for oil and natural gas for mobility and energy purposes. Enbridge also enjoys pricing power due to a 40% market share in oil transport in North America and a 20% market share in natural gas.
The company aims to invest C$4 billion in renewable energy and another C$19 billion in oil/natural gas capacity. Further, Enbridge has grown its already stellar dividend yield of 6.61% at 10% CAGR over the last 25 years, showing the resilience of its business.
In FY20, Enbridge reported revenues of C$39.09B (down 21% YoY) and a net profit of C$3.36 billion (down 41% YoY). In Q2’21, the company reported revenue of C$10.9 billion (up 37.6% YoY) and a net profit of C$1.48 billion (down 14.76% YoY).
Canadian National Railways (TSE: CP)
Sector – Travel and Logistics
Market Capitalization – C$103.91 billion
P/E – 26.04
Dividend Yield – 1.68%
The Canadian National Railways is a government-owned entity that owns the national rail network of Canada that spans 20,000 miles across Canada, the US, and Mexico. The company is a tremendous defensive play because it has a very stable demand, has a very bright future due to its ultra-competitive freight rates, high capital intensity, and government regulation. CNR has an exceptionally bright future as the pandemic has accelerated digitization and boosted e-commerce penetration by several years, thus increasing the demand for logistics, where rail is the undisputed king in terms of price and capacity. Further, the company enjoys immense pricing power due to high barriers to entry and alignment of interests with the government. The freight business is also expected to become much cheaper and more stable due to the increasing adoption of affordable renewable energy from solar/wind farms.
In FY20, the CNR reported revenues of C$13.82 billion (down 7.36% YoY) and a net profit of C$3.56 billion (down 15.51%). In Q2’21, the company reported a revenue of C$3.6B (up 12.12% YoY) and a net profit of C$1.03 billion (up 89.72% YoY).
Barrick Gold Corp. (TSE: ABX)
Sector – Precious Metals Mining
Market Capitalization – C$40.44 billion
P/E – 12.91
Dividend Yield – 1.96%
Barrick is the largest gold miner globally by capacity, with 27 operating mines and an annual production of 4.8 million ounces in FY20. The company is an excellent defensive stock due to the immense resilience enjoyed by the company due to economies of scale from being the largest gold miner in the world. Further, we are in a time of record-high inflation with equities at all-time high valuations propped up by printed money; when markets correct in the medium-to-long term, investor interests will shift to popular inflation hedges like gold. Further, the company enjoys a massive margin of safety due to low costs from scale and operating leverage, meaning that when the price of gold goes up, the company benefits hand-over-fist as its operating cost of production remains the same. In 2020, Barrick reported all-in gold production costs of $967, compared to average selling costs of $1700+, highlighting its considerable margin of safety.
The company is also a significant player in copper, which enjoys sustained and rapidly growing demand from electronics, renewable energy markets, and the burgeoning EV market. Barrick reported all-in copper production costs of $2.23 per pound in FY20, compared to the average price of $4.25 per pound today.
Barrick also enjoys barriers to entry from regulations in mining, high capital intensity, and its stellar reputation, which is a significant advantage in a business such as gold, where the authenticity of the product is heavily scrutinized.
In FY20, Barrick reported revenue of C$12.6 billion (up 29.62% YoY) and a net profit of C$2.32 billion (down 41% YoY); the drop in profit was mainly on account of halted operations from lockdowns and social distancing requirements. In Q2’21, the company reported a C$2.89 billion (down 5.3% YoY) and a net profit of C$411 million (up 15% YoY).
A quick look at historical statistics corroborates that defensive stocks are long-term outperformers of significant indexes such as the TSX/S&P 500/Dow Jones due to steady long-term growth and small drawdowns. Research shows that sectors such as those listed above have mostly outperformed significant indexes during the last eight major market corrections, with consumer staples, utilities, and healthcare beating their indexes in 7 out of 8 significant drawdowns while telecom and energy were outperforming in 4-5 drawdowns. Defensive stocks also provide consistently higher dividend yields than others along with stability and growth, which is why they deserve a spot in every investor’s portfolio.
Canadian Defensive Stocks TSX
One of the best ways to increase the value of a portfolio of stocks and protect it against adverse market movements is by adding Canadian dividend stocks. Canadian dividend aristocrats provide income in any market environment. Below is a brief excerpt of the top 10 dividend growth stocks and opportunities identified by the Canadian Dividend Stock Screener.
Choosing stock market investment opportunities is often risky if there are several market segments to be wary of, and you should avoid riskier investments. This suggests steering clear of assets that promise stellar growth for the short term, but you fear a significant decline. Yet, from cryptocurrency to the world of electric vehicles, the market is booming.
Best Defensive Canadian Stocks to Buy discusses why Canadian dividend stocks will continue to deliver wealth gains and protect you from the effects of a sharp correction in the stock market.
Adding defensive assets to your portfolio is ideal for safeguarding your capital when the stock market undergoes a significant correction in the coming years. Therefore, the most critical parameter in classifying a defensive stock is its established presence as a reliable market participant.
Companies that have had stable operations for at least a decade can be described as defensive stocks. These companies typically have a high market capitalization, reflecting investor confidence in their operations. Cyclical stocks, on the other hand, often turn out to be high-risk outperformers.
Overall, I am confident that Telus will continue to grow on balance despite the potential downturn and perform well in the current market environment. However, people who need food might be better off with a more defensive name and investing in Telus.
The company has one of the best financial positions of any Canadian REIT, excluding debt and a gross book value of over 40%. Its dividend represents less than 75% of operating cash. The dividend yield is a reasonable 2%, and the company will continue to grow through acquisitions. In my opinion, Telus is a safe holding company that continues to grow and still has an attractive valuation.
The company will invest $3.2 billion over the next three years to expand its regulated utilities. The company’s steady cash flow has enabled it to increase its dividend for the past 49 consecutive years, the longest of any Canadian public company. The company will pay a quarterly dividend of $0.4398 per share, and its forward return is 5%.
The US is the largest market, accounting for 70% of total sales, with Canada accounting for 30%. The company owns 37 wood processing plants in sixteen United States and five Canadian provinces and a vast distribution network throughout North America.
Quebec retains 70% of the company-owned and franchise-run food and drug markets. However, with the significant acquisition of Jean Coutu in 2018, the company entered the pharmacy scene and now has a dominant presence in Quebec’s major grocery stores.
The integrated waste management company has disposal sites close to waste streams, giving it a competitive advantage over other companies. In addition, the company operates in secondary and exclusive markets, enabling it to maintain its margins.
Manulife is a financial company that provides financial advice, insurance, wealth management and asset management solutions to individuals, groups and institutions. The company offers a wide range of financial protection and asset management solutions that meet individual and group clients’ current and future needs. As of March 2018, Manulife had under management $11 trillion in assets, making it one of the world’s largest life insurance companies.
High Liner Foods Incorporated (HLF: 447.92 million dollars, $20.63) High Liner processes, markets, prepares and packages frozen seafood in the United States and Canada. 511.85 million, -6.57%) Corby produces, markets and imports spirits and wine.
Today, CCEP is the world’s largest cola bottler with annual sales of 13.5 billion euros and a total market of more than 600 million consumers in 29 countries.
The acquisition of Coca-Cola Amatil accelerated the company’s sales growth by 25% and gave CCEP access to lucrative markets in Australia and New Zealand. On a per-capita basis, the two companies will sell more than 3 billion cases of products in 2020, 60% of which will come from Coke. By 2025, the company expects the common market to grow from more than 600 million consumers in 29 countries to 13.8 billion euros.
The expansion rate is based on the company’s earnings and cash flow. The company plans to invest in the next five years from $19.6 billion in spending and increase its base rate (CAGR of 6%) to $40.3 billion. In addition to increasing cash flow, management also plans to increase the dividend by 6%.
The company will release its fourth quarter and full-year 2021 financial results after the TSX closes today. Analysts believe the stock is currently undervalued at $32 and has an upside potential of 4.2 to 4.7 percent.
Canadian stocks, which are listed on the TSX, have lagged the overall market in recent years. The TSX does not offer many defensive options for the consumer sector, although the industry accounts for about 35% of the Canadian market. Today is an excellent opportunity to add undervalued defensive consumer stocks like Andrew Peller, Alimentation Couche-Tard, and so on.
The volatility of defensive stocks is determined by their beta coefficient, which remains relatively low. This ability to generate stable returns means that defensive stocks do not experience dramatic leaps in returns when the stock market recovers. The lack of volatility in defensive stocks can be attributed to a constant demand for their products.