Yahoo Finance Better RRSP Buy: BCE or Royal Bank Stock?
Written by Andrew Walker at The Motley Fool Canada
BCE (TSX:BCE) and Royal Bank (TSX:RY) are leaders in their respective industries in the Canadian market and have long track records of dividend growth. Investors are wondering if BCE stock or RY stock is undervalued and good to buy today for a self-directed Registered Retirement Savings Plan (RRSP) targeting dividends and total returns.
BCE
BCE took a beating over the past year as high interest rates, falling media revenue, and mobile price wars drove investors to the sidelines. At the time of writing, BCE trades near $45 per share, down roughly 30% over the past 12 months.
The decline actually began two years ago when the Bank of Canada started raising interest rates to try to get inflation under control. Higher interest rates push up borrowing costs for companies like BCE that use debt to fund part of their capital programs. BCE invests billions of dollars every year in network upgrades. A jump in debt expenses hits profits and can reduce cash available for distributions. BCE raised the dividend by 3.1% for 2024. This is good news for investors, given the market headwinds, but the increase is lower than the 5% average over the previous 15 years.
BCE announced two rounds of job cuts over the past year, with a total reduction in the range of 6,000 positions. The moves will trim expenses and help BCE meet its financial targets for 2024 and 2025. Headwinds are expected to persist over the near term, but BCE still expects to generate 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) that are in line with 2023. Based on that outlook, the stock is probably oversold at this level.
BCE’s dividend should be safe as long as there isn’t a material decline in the financial situation in the coming years. At the current share price, investors can get a dividend yield of 8.9%.
Royal Bank
Royal Bank is the largest company on the TSX, with a current market capitalization of $187 billion. The bank remains very profitable even as it sets aside more cash each quarter to cover potential bad loans. Royal Bank reported adjusted earnings of about $16 billion in fiscal 2023.
High interest rates are typically positive for banks as they enable financial institutions to generate better net interest margins. The sharp increase in interest rates over such a short period of time, however, is putting over-leveraged businesses and households in a difficult situation. So far, the economy has absorbed the rate hikes without major pain, but there is a risk that a deep recession could occur if the Bank of Canada is forced to keep interest rates elevated through the end of 2024 and into 2025. A steep drop in sales for businesses could lead to a surge in unemployment as companies are forced to cut staff. In that scenario, defaults in commercial loans and residential loans could rise considerably.
Economists still expect the economy to navigate a soft landing as the central bank gets inflation back down to the 2% target and begins cutting interest rates. Royal Bank’s overall loan book remains in good shape and the bank has a solid capital cushion to ride out some turbulence.
In addition, the recent completion of the acquisition of HSBC Canada should boost revenue and profits.
Royal Bank stock is up more than 20% in the past six months. At the current price of $132.50, investors can get a 4.1% dividend yield.
Is one a better pick?
Contrarian investors seeking high-yield passive income should consider BCE at this level. Additional downside is certainly possible, and no dividend is 100% safe, so there are risks, but the pullback is likely exaggerated, and there could be a nice bounce when interest rates begin to decline.
Royal Bank isn’t cheap at the current share price, but the stock deserves to be on your radar as a core holding for a buy-and-hold RRSP targeting solid long-term total returns. If you simply want to buy and forget, RY might be the better choice right now.
The post Better RRSP Buy: BCE or Royal Bank Stock? appeared first on The Motley Fool Canada.
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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of BCE.
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