Safety Stocks Come with a Steep Price Tag
Safety has never come at such a steep price in the stock market. Canadian bank stocks are trading at historically lavish price-to-earnings (P/E) multiples, with ratios of 14 to 18 times earnings, compared to their usual range of 10 to 12 times.
Investors are flocking to these supposedly safe stocks as a haven from the uncertainty and volatility in the market. However, this surge in demand has driven prices up, making them less attractive than they seem.
The Canadian banks' key domestic market is facing challenges such as declining population, falling home prices, and a trade war with the US. These factors would normally be negatives for the banks, but investors are prioritizing safety over potential growth.
The dividend stocks, including Royal Bank of Canada RY-T, Canadian Utilities Inc. CU-T, and TC Energy Corp., have seen their yields drop significantly as prices rise. For example, Royal Bank's yield has fallen from 4% to 2.4%, while Canadian Utilities' yield has dropped from over 5% to 3.3%.
This means that investors are getting bond-like payouts with equity-like volatility, which is not a great combination. Some experts recommend looking at beaten-down software stocks such as Constellation Software Inc. CSU-T and IBM Corp. IBM-N, which have seen significant price drops in recent months.