Is it Time to Buy Royal Bank of Canada?

Here’s what investors need to know about the current situation at Royal Bank of Canada (TSX:RY)(NYSE:RY).

| More on:
The Motley Fool

Royal Bank of Canada (TSX:RY)(NYSE:RY) is down about 9% for the year, and investors are wondering if the recent pullback is a good opportunity to start a position in the stock.

Let’s take a look at the current situation to see if this is the right time to add Royal to your portfolio.

Earnings

Royal delivered solid result for its third quarter, which ended July 31. The bank reported net income of $2.475 billion, a 4% gain over Q3 2014. Investors should see the strong numbers as an indication of management’s ability to produce higher profits in a difficult environment.

Royal relies on Canada for 63% of its revenue, while 19% come from the U.S., and the international operations account for the remaining 18% of profits. This diversification provides a good hedge against the weakness facing the Canadian economy, and investors should see the U.S. group become more significant in the coming years.

Royal is spending US$5.4 billion to buy City National, a California-based wealth management and commercial banking company. The deal should close by the end of this year and contribute to earnings in 2016.

Dividend safety

Royal recently bumped up its quarterly dividend by 3% to $0.79 per share. The company has increased the payout nine times in the past five years, and investors should see the trend continue.

The current distribution is very safe and pays a nice 4.3%.

Canadian economic risks

Royal finished the third quarter with $201 billion in Canadian residential mortgages on its books. That sounds like a lot, and it is, but the number is actually quite reasonable when compared with the other big banks on a market cap basis.

In the Q3 statement Royal said 39% of the portfolio is insured and the loan-to-value ratio (LTV) on the uninsured mortgages is 55%. The insured component is lower than the other banks, but the LTV on the rest is good. Alberta represents about 15% of the mortgage loans.

The housing market would have to drop significantly in a short period of time for Royal to incur any material losses. At the moment, analysts expect a gradual pullback rather than a bursting of the bubble.

The other concern is exposure to oil and gas companies. Royal’s outstanding wholesale loans to the energy sector represent just 1.6% of the total loan book. In the Q3 earnings statement the company said it hasn’t seen any significant problems with the segment. The total exposure is about $7.5 billion.

Should you buy?

Royal is a great long-term investment. The stock currently trades for just 10.6 times forward earnings, which is very attractive compared with the historical average.

The company is well capitalized with a CET1ratio of 10.1%, so it is more than capable of riding out the current market headwinds.

Buy-and-hold investors should consider adding the stock to their portfolio at this price point.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned.

More on Bank Stocks

Question marks in a pile
Bank Stocks

Should You Buy Canadian Western Bank for its 4.8% Dividend Yield?

Down 35% from all-time highs, Canadian Western Bank offers a tasty dividend yield of 4.8%. Is the TSX bank stock…

Read more »

analyze data
Bank Stocks

The Average Canadian Stock Investor Owns This 1 Stock: Do You?

This Canadian stock has about 49% ownership by the public, and with growth and dividends to consider, it's a top…

Read more »

falling red arrow and lifting
Stocks for Beginners

1 Dividend Stock Down 18% to Buy Right Now

CIBC (TSX:CM) is a strong dividend stock investors should certainly consider not just for passive income, but future growth as…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Tech Stocks

Forget TD Stock: 2 Tech Stocks to Buy Instead

TD remains a solid income stock but two outperforming tech stocks are better buys for their strong growth and upside…

Read more »

Question marks in a pile
Bank Stocks

Where Will Royal Bank of Canada Stock Be in 5 Years?

Royal Bank's continued focus on a strong capital position plus its acquisition of HSBC will likely ensure prosperous times ahead.

Read more »

Payday ringed on a calendar
Bank Stocks

How to Build a Bulletproof Monthly Passive-Income Portfolio With Just $10,000 and TD Stock

TD (TSX:TD) stock has been a poor performer over the last few years, but could be a big passive-income winner…

Read more »

Man considering whether to sell or buy
Bank Stocks

Is RBC Stock a Buy, Sell, or Hold?

Shares of Royal Bank of Canada have delivered game-changing returns to shareholders in the last two decades. Is RBC stock…

Read more »

Dice engraved with the words buy and sell
Bank Stocks

Is Scotiabank (BNS) Stock a Buy, Sell, or Hold?

Let's dive into whether the Bank of Nova Scotia (TSX:BNS) remains a solid buy or if it's more of a…

Read more »