Image source: Getty Images
Central banks around the world have adopted monetary tightening initiatives to prevent rising inflation, including raising interest rates. Last month, the Bank of Canada raised its benchmark interest rates by 0.25% to 4.75%. This is the first hike since January. Meanwhile, interest rates in Canada reached their highest level since May 2001. A prolonged high interest rate environment could harm global growth, thereby affecting equity markets.
However, some companies are less susceptible to interest rate hikes. Here are my two top picks for investors to buy to protect their portfolio in this high-interest environment.
Pizza Royalty
Pizza Royalty (TSX:PZA) operates Pizza Pizza and Pizza 73 brand restaurants through a highly franchised business model. It collects royalties from its franchisees based on their sales. Therefore, the rise in prices and inflation in wages will have little impact on its finances. In addition, the company continued to deliver strong performances, with same-store sales growing 13.6% at the end of the March quarter.
Growth in consumer traffic and check size drove same-store sales. The reopening of non-traditional restaurants, value messaging, and brand promotions are driving its traffic, while higher prices and a favorable marketing mix are boosting check sizes. this. Also, the company’s adjusted EPS (earnings per share) grew by 16.2%. Backed by its strong financials, the company has raised its monthly dividends seven times since April 2020. It pays a monthly dividend of $0.075/share, with its current yield at 6.08%.
Additionally, due to restaurant expansion plans and same-store growth, I expect Pizza Pizza Royalty’s financial growth to continue. Moreover, due to its asset-light business model, rising interest rates will not hurt its growth. Meanwhile, the company is trading at an attractive NTM (next 12 months) price-to-sales multiple of 0.8, making it an attractive buy.
Dollarama
Dollarama (TSX:DOL) is another excellent stock to add to your portfolio in this high interest environment. The company sells a variety of consumables, general merchandise, and seasonal products at attractive prices. Due to its extensive presence with 1,507 stores, the company has 80% of the Canadian population within 10 kilometers of its stores. With inflation creating deeper holes in consumers’ pockets, the company’s value and affordable product mix attracted more customers.
In the quarter-ending quarter, Dollarama’s topline grew by 20.7%. Same-store growth of 17.1% and the net addition of 76 stores over the past 12 months drove the company’s sales. A 15.5% increase in its transactions and a 1.4% increase in average ticket size drove the company’s same-store sales. The company witnessed strong sales across product categories in the quarter.
Dollarama also posted solid net income of $179.9 million in the quarter, representing a 23.6% growth from the year-ago quarter. Additionally, it generated EBITDA (earnings before interest, taxes, depreciation, and amortization) of $366.3 million in the quarter, with an EBITDA margin of 28.3%. The company closed the quarter with available liquidity of $1.3 billion. Therefore, it is well equipped to fund growth initiatives.
Meanwhile, Dollarama plans to increase its store count to 2,000 by 2031 by adding 60-70 stores annually. In addition, it is strengthening its direct purchasing capabilities and improving logistics efficiency, which could boost its financials in the coming years. So, I’m bullish on Dollarama despite the interest rate hike.