The boom in artificial intelligence (AI) investments over the past two years sent share prices of some tech stocks soaring. Investors who got in early have done very well. Those who missed the rally are wondering how they can still benefit from AI without adding too much risk to their portfolios.
Tech stocks in the AI space now trade at valuations that assume the party will continue in the next few years. At this point, it is too early to tell if the massive investments in AI will deliver the anticipated returns. Bulls argue that AI is going to be as transformational for the world as the launch of the smartphone. Bears are concerned that the market is way ahead of itself, and a nasty correction is on the way. Both camps could prove to be correct.
One way conservative investors can get exposure to AI without buying expensive tech stocks is to look for companies that should benefit from adopting AI to make their businesses more efficient and profitable.
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TD Bank
TD (TSX:TD) is arguably a contrarian pick today. The stock is out of favour with bank investors due to challenges faced by the American operations. TD is under investigation by U.S. regulators for not having adequate systems in place to detect and prevent money laundering. In the fiscal third quarter (Q3) 2024 earnings report, TD took a US$2.6 billion charge to cover anticipated fines connected to the issue. This is on top of a previous US$450 million provision, bringing the expected hit to more than US$3 billion. TD said it sold part of its stake in Charles Schwab, an American financial firm, to cover the latest provision.
On the positive side, TD says it expects final penalties to be in the range of US$3 billion, so there shouldn’t be more surprises on that front. The bank will eventually get the issue sorted out, and the overall business will continue to perform well despite the distractions. Adjusted fiscal Q3 2024 net income came in at $3.65 billion, largely in line with the same quarter last year.
Financial firms stand to benefit from the adoption of AI programs. TD and its peers can use AI to improve fraud detection to protect customers. This will reduce expenses and lead to happier clients. The insurance business can use AI to analyze data quickly to identify risks, process claims, and approve new policies. On the banking side, loan applications can be processed at a faster pace, and AI can be used to analyze client data to find opportunities to pitch new products and services. Finally, the wealth management business can use AI to help identify investing opportunities or provide advice to self-directed investors with broker accounts.
TD trades near $80 per share at the time of writing. The stock was as high as $108 in early 2022, so there is decent upside potential for patient investors. In the meantime, investors get paid well to wait. The stock currently provides a 5% dividend yield.
BCE
BCE (TSX:BCE) is another TSX giant that is in the penalty box with investors. The stock trades near $47 per share at the time of writing. It was $74 at one point in 2022 before aggressive interest rate hikes sent communications stocks into a correction as investors worried about rising debt expenses.
The Bank of Canada has started to cut interest rates, and economists expect rate reductions to continue through next year as the central bank tries to navigate a soft landing for the economy. Lower borrowing expenses will help the bottom line and should free up more cash to cover dividends. Investors should also see the full impact of cost-cutting efforts next year. BCE has reduced staff by more than 10% and trimmed its media portfolio to position the business to meet financial targets in a challenging media environment.
BCE and other communications providers are similar to banks in that they can use AI to analyze vast client data and provide customized product and service recommendations. AI programs will also be helpful to improve customer support services and should enable further cost savings.
Investors who buy BCE stock at the current level can get a dividend yield of close to 8.5%.
The bottom line on AI investing
TD and BCE are good examples of companies that should benefit from the adoption of AI in their operations. The stocks pay attractive dividends and currently trade at discounted prices. Near-term volatility should be expected, but TD and BCE deserve to be on your radar for a buy-and-hold portfolio.
