The recent market sell-off is finally giving investors a chance to pick up some of Canada’s top names at attractive prices. Royal Bank of Canada (TSX:RY)(NYSE:RY) is a core holding in many Canadian portfolios, and investors who don’t already own the stock should take a closer look.
Here’s why.
1. Diversified earnings
Royal Bank recently reported strong results for the quarter ended July 31. Net income was $2.475 billion, up $97 million, or 4%, from the same period last year. The numbers are impressive given the economic headwinds facing Canadian banks. Part of Royal Bank’s success comes from the diversification of its revenue stream both by geography and segment.
Over the past 12 months, 63% of Royal Bank’s revenue came from its Canadian business. The U.S. contributed 19% of the cash flow and the international division added the remaining 18%.
Earlier this year, Royal Bank announced an agreement to purchase California-based City National for US$5.4 billion. The deal is expected to close before the end of 2015, and investors should see the U.S. division grow in importance in the coming years. Royal Bank also gets its earnings from a variety of business segments.
Over the past year, personal and commercial banking activities were responsible for 52% of the company’s earnings. The capital markets group contributed 23% while wealth management added 11% and Royal Bank’s growing insurance division brought in 8% of profits. Investor and treasury services kicked in the reaming 6% of earnings.
2. Dividend growth
Royal Bank just increased its dividend by 3%. The new quarterly payout of $0.79 per share yields 4.4%.
The company has a strong history of raising the payout and the latest hike suggests management isn’t overly concerned about earnings in the coming quarters. It’s difficult for investors to find good dividends that are also safe, but Royal Bank’s distribution is one that you can count on.
3. Low loan risks
Royal has $201 billion in Canadian residential mortgages on its books. Insured mortgages represent 39% of the portfolio and the loan-to-value ratio on the remainder is 55%. This means the housing market would have to fall off a cliff for Royal Bank to incur any serious losses.
The company’s exposure to the oil and gas sector sits at 1.6% of the total loan book. If oil prices remain at current levels, the company could see an increase in loss provisions for the wholesale side of the energy exposure, but it is a small number compared to the overall loan portfolio.
4. Strong capital position
Royal is very well capitalized with a CET1 ratio of 10.1%. Investors can rest assured that the company is capable of riding out an economic slump as well as a pullback in the housing market.
5. Attractive valuation
Royal Bank trades at 10.3 times forward earnings and 1.9 times book value, which are attractive metrics compared to the company’s historical averages.
