3 Reasons Why Royal Bank of Canada Belongs in Your Portfolio

Its shares have done well over the past year, but that’s no reason to abandon ship.

| More on:
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Royal Bank of Canada (TSX: RY)(NYSE: RY) has certainly been on a great run, with its shares returning 29% over the past year. As a result, the company may seem overly expensive, but there are plenty of strong arguments for why it still belongs in your portfolio.

1. Strong market share

More than ever, providing financial services is very costly. Just keeping up with regulatory and technology requirements leads to a large bill. This means that size matters; the bigger the bank, the more easily it can handle those costs.

And Royal Bank certainly has plenty of size — in Canada, it has the No. 1 or No. 2 position in all product categories in Canadian banking, which helps keep costs down. To illustrate, it has nearly twice as many financial assets as Bank of Montreal (TSX: BMO)(NYSE: BMO) in its Canadian banking operations. By no coincidence, it was more profitable last year in Canada — its expenses as a percentage of revenue were 44.5%, while Bank of Montreal’s expenses were over 51%. The bank also made nearly 20% more profit per employee than Bank of Montreal.

2. Excellent track record

Over the course of a single year, any company can have a surging stock price. But over a longer period of time, a strong share price performance can come only from performing well as a company. Royal Bank of Canada has performed better than any of the other big five banks over the past decade, with its shares returning 12.2% per year.

Meanwhile, just to pick on Bank of Montreal again, its shares have only returned 6.8% per year over the same time period. With this kind of track record, it’s much harder to justify betting against Royal Bank of Canada or its management team.

3. Still not too expensive

Whenever a company sees its shares surge, that often means it has become overvalued — but that doesn’t seem to be the case with Royal Bank of Canada.

The bank still only trades at 12.6 times trailing earnings, not out of line at all for a Canadian bank. It’s actually less than the 14.6 price-to-earnings ratio of Toronto Dominion Bank (TSX: TD)(NYSE: TD), even though Royal Bank is more profitable — over the past 12 months, it has a return on equity of more than 20%, while TD Bank’s ROE is less than 15%.

As a result, Royal Bank of Canada’s shares have a nice dividend yield of 3.8%, even though the company pays out less than half of its earnings as dividends. If you’re looking for a nice steady payout, this bank still makes a great staple in your portfolio.

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 Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Hands holding trophy cup on sky background
Investing

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Here are three top TSX growth stocks that may be worth a look, given the significant valuation declines these stocks…

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Why Real Estate Stocks Are a No-Brainer Addition to Your Portfolio

Real estate stocks, especially REITs, offer some distinct advantages over other types of stocks, making them must-have additions to most…

Read more »

Man data analyze
Stocks for Beginners

Beginners: 2 Market-Beating Stocks Just Getting Started

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) and Constellation Software (TSX:CSU) are proven market beaters that could continue their ways.

Read more »

oil and natural gas
Energy Stocks

Small OPEC+ Oil-Output Hike: Buy More Energy Stocks?

Energy stocks could soar higher, because oil markets will remain tight due to the small production increase by OPEC+.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Top TSX Dividend Stocks to Buy for Monthly Passive Income

Top TSX stocks with monthly dividends now trade at cheap prices for investors seeking passive income.

Read more »

edit Person using calculator next to charts and graphs
Investing

Where to Invest $500 in the TSX Right Now

Long-term investors can look to buy stocks, including Suncor Energy and Shopify, as they are poised to outpace the broader…

Read more »

Canadian Dollars
Dividend Stocks

Create Free Passive Income and Turn it Into Thousands With 1 TSX Stock

If you can't afford to invest, you can certainly create passive income another way and use that to invest in…

Read more »

falling red arrow and lifting
Investing

2 Oversold TSX Stocks That Should Bounce Back

Stocks that are oversold without an external catalyst like a market crash or a weak sector might be risky buys,…

Read more »