Artificial intelligence (AI) went mainstream with the launch of large language models in the past two years. Media coverage on AI opportunities is now constant across investor platforms, and the stellar returns of leading AI gear manufacturers have made some people very wealthy in a short period of time.
Investors who missed the tech rally driven by AI up to this point are wondering how they can get AI exposure in their portfolios without taking on too much risk. Tech stocks connected to AI currently trade at high multiples that assume strong sales growth in the coming years. Returns could materialize as expected, but some older investors remember the tech hype that occurred 25 years ago and are concerned that another dot-com-style bubble could be brewing.
However, AI enthusiasm could be warranted. The technology will likely have the largest impact on the day-to-day lives of business people since the emergence of the smartphone. The transition will be both disruptive and exciting, with some industries seeing profound changes. As such, it makes sense for investors to consider stocks of companies that could benefit from adopting AI to improve their operations or those that will do well as AI infrastructure expands.
Royal Bank
Royal Bank (TSX:RY) is the largest financial institution in Canada, with a current market capitalization of more than $215 billion.
The bank has large operations across diverse segments that include retail banking, commercial banking, capital markets, wealth management, and insurance. Each one of these areas will benefit from the adoption of AI programming to analyze vast amounts of client data to personalize product offerings, speed up approvals for loans and insurance policies, and respond better to customer requests.
On the wealth management side, AI will help staff analyze investment opportunities. The programs can also be used to provide self-directed investors with better tools to manage their own portfolios. Insurance can benefit from more robust and timely risk analysis. On the lending side, approvals for commercial loans could occur faster, and automation might be expanded to larger sums. This can lead to lower staff costs, among other benefits.
Royal Bank has been investing heavily in tech solutions for years. The use of AI will supercharge the progress that can be made across the business. These investments are not cheap, but Royal Bank has the financial firepower required to fully harness AI capabilities.
Royal Bank trades near its all-time high, but a good tailwind should be building for the bank sector. Falling interest rates should reduce provisions for credit losses (PCL) in the coming quarters as households and businesses with too much debt get rate relief. If the economy has a soft landing, investors might even see PCL reversals that would buffer earnings.
Royal Bank is already a very profitable bank. The adoption of AI should make the company more efficient, help reduce expenses, and boost returns on invested capital. Investors who buy RY stock at the current level can get a 3.7% dividend yield.
TC Energy
AI data centres consume significant amounts of electricity, and thousands of new ones will be built in the coming years. When added to the anticipated surge in power demand from electric vehicles, there are concerns that existing power grids will not be able to handle the load.
With this in mind, many AI data centre firms are planning to build on-site electricity generation to deliver the power required to ensure smooth operations of the facilities. One popular and flexible option being considered is the installation of gas-fired power generation. Natural gas emits less carbon dioxide than oil or coal when burned. The fuel is abundant and relatively cheap in North America. Installation of solar and wind power is preferred, but this will not be feasible in all areas and even where it is possible, the renewables have limitations. You can’t command the wind to blow harder when there is a demand surge for power.
TC Energy (TSX:TRP) is primarily a natural gas transmission and storage player with 93,000 km of pipelines and 650 billion cubic feet of storage capacity in Canada, the United States, and Mexico. In a recent statement, the company said its infrastructure is within 24 km of 60% of the roughly 300 AI data centres in the United States that are currently planned or under construction.
TC Energy has increased its dividend in each of the past 24 years. Investors who buy TRP stock at the current price can get a dividend yield of 6.3%.
The bottom line on AI investing
Canadian investors can look beyond the tech names to get AI exposure in their portfolios. Royal Bank and TC Energy are good examples of top TSX stocks that should benefit from AI in the coming years.
