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:

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

Tech Stocks

3 Magnificent Stocks That Have Created Many Millionaires, and Will Continue to Make More

Shopify stock is an example of a millionaire-maker stock that is likely to continue to thrive in the long run.

Read more »

Couple relaxing on a beach in front of a sunset

3 Stocks to Buy Now That Could Help You Retire a Millionaire

These three Canadian stocks are highly reliable and have tremendous long-term growth potential, making them some of the best to…

Read more »

hand using ATM
Dividend Stocks

Should Bank of Nova Scotia or Enbridge Stock Be on Your Buy List Today?

These TSX dividend stocks trade way below their 2022 highs. Is one now undervalued?

Read more »

A data center engineer works on a laptop at a server farm.
Tech Stocks

Why Hut 8 Stock is Up 44% in the Last Week

Hut 8 stock (TSX:HUT) has surged in the last week, and even more year to date. But if you think…

Read more »

Coworkers standing near a wall
Tech Stocks

Why Nvidia Stock Fell 10% Last Week

Nvidia stock (NASDAQ:NVDA) fell by 10% last week after its competitor announced an earnings date, but without preliminary results.

Read more »

A meter measures energy use.
Dividend Stocks

Here’s Why Canadian Utilities Is a No-Brainer Dividend Stock

Canadian Utilities stock is down 23% in the last year. Even if it wasn’t down, it is a dividend stock…

Read more »

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

Got $5,000? Buy and Hold These 3 Value Stocks for Years

These essential and valuable value stocks are the perfect addition to any portfolio, especially if you have $5,000 you want…

Read more »

Growing plant shoots on coins
Dividend Stocks

3 Magnificent Ultra-High-Yield Dividend Stocks That Are Screaming Buys in April

High yield stocks like BCE (TSX:BCE) can add a lot of income to your portfolio.

Read more »