The specter of a stagflation is here following oil’s biggest daily swing early this week. Alarm bells are ringing globally, as traders expect crude prices to rise to US$200 per barrel or above soon. JPMorgan Chase & Co. sees Brent crude to sell at US$185 by year-end if be disruptions of Russian oil supplies continue.
Stagflation is worse because, besides an inflationary environment, economic growth would be slow, if not stagnant. A third factor that could compound the situation is high unemployment rate. In Canada, the unemployment rate rose from 5.9% in December 2021 to 6.5% in January 2022, before the armed conflict in Eastern Europe.
A severe market correction is possible due to accelerating inflation. For investors, preparation is key to navigate stagflation risks. It would be best to have Royal Bank of Canada (TSX: RY)(NYSE: RY) and Fortis (TSX: FTS)(NYSE: FTS) as anchor stocks.
Ready for any uncertainty
RBC has been a steady performer since the start of 2022. At $136.30 per share, the big bank stock is up 2.38% versus the TSX’s year-to-date gain of 0.38%. Given the 39.06% payout ratio, the 3.47% dividend should be safe and sustainable. Canada’s largest bank and most valuable publicly listed company is the perfect anchor in times of uncertainty.
The $193 billion ended fiscal 2021 with a dividend hike (11%) and share-buyback ($5.68 billion) announcement in fiscal 2022. In Q1 fiscal 2022 (quarter ended January 31, 2022), net earnings grew 6% to $4.1 billion versus Q1 fiscal 2021. According to RBC’s president and CEO David McKay, it was the bank’s second-highest growth on record. He added that it underscores the strength and scale of RBC’s franchises.
After the Bank of Canada increased its key interest rate to 0.5% effective March 2, 2022, RBC raised its prime lending rate by 25 basis points to 2.7%. With the increase in short-term interest rates, its CFO, Nadine Ahn, expect RBC’s Canadian Banking and U.S. Wealth Management businesses to generate more than $175 million in additional revenues over 12 months.
RBC’s chief risk officer Graeme Hepworth said the bank can manage through any uncertainty because of its prudent risk-management approach and the quality of its client base. Note, too, that the bank stock’s dividend track record is 152 years.
Best defensive asset
Risk-averse stock market investors turn to Fortis when the going gets tough. TSX’s top-tier utility stock is the asset to own if you need a hedge against inflation. The $29.05 billion regulated electric and gas utility company is on track to achieve Dividend King status in 2023. Its dividend-growth streak is now 49 consecutive years.
In 2021, net earnings increased 1.8% to $1.23 billion versus 2020. The bulk of its $3.6 billion capital expenditures for the year went to resiliency, modernization, and sustainable energy projects. About $600 million was spent on cleaner energy investments.
With a $20 billion five-year capital plan (2022 to 2026), Fortis expects its rate base to be $41.6 billion by 26%. Because of the projected 6% five-year compound annual growth rate, management targets a 6% average annual dividend growth through 2025. If you invest today, the share price and dividend yield are $61.18 and 3.5%, respectively.
Protection against stagflation
The present economic conditions could lead to stagflation. Investors need protection against the worst type of inflationary period.
