Banks can be a really great investment for your portfolio, but they can also be dangerous. Every positive and negative event that happens to the economy can have an effect on the bank’s bottom line. And Royal Bank of Canada (TSX:RY)(NYSE:RY) is no different.
I believe that Royal Bank is in a good position to do well through 2015 and the future. Times could get rough, but my advice is to look at the company as an investment to add to your portfolio. Here are three reasons.
1. Oil investments aren’t that great
Oil is one of the many types of businesses that Royal Bank has put money in. Investors are naturally concerned because of where the price of oil currently is. “If oil plummets, won’t these debtors be unable to make good on their loans?”, an investor might ask.
While that is possible, Dave McKay, the CEO of Royal Bank, said that energy lending comprised US$9.6 billion of the bank’s total book. That’s only 2.1%. And half of that goes to very stable utilities. Therefore, less than $5 billion is allocated to potentially volatile energy companies.
There is some merit to the concern that 19% of its loans are in Alberta, which is big in the oil industry. Because of this, I suggest that you not start buying right away.
2. Strategic expansions
There has been a tepid response to Royal Bank’s announcement that it would be buying City National Bank for over US$5.4 billion. This acquisition would push it back into the U.S., which it once tried to do and failed. However, I think this attempt is a smarter investment because of the target market.
City National is known for working with affluent individuals and entrepreneurs. Therefore, RBC can be selective about where it opens branches. Naturally, it’ll strengthen its position in California, but the CEO also told journalists that he plans to expand to Houston because there’s a lot of oil money there. The bank will also cement its holdings in Washington, D.C., and New York. And he hinted at expanding into London.
Running a bank for affluent people is a great way to generate significant revenue. But this acquisition likely won’t have much of an effect on the bank’s earnings for another two or three years, so think of it as rewarding you in 2017 or 2018.
3. Attractive point of entry and dividends
Royal Bank is down nearly 10% from its high back in November. That is a really attractive place to start a position. As the saying goes, buy the dip. No one would fault you for starting a position here, but I think there might be a few more percentage points to gain if you wait a little longer to buy. And on top of that, the bank pays a really lucrative 3.99% yield. Unless there are really serious economic problems, I don’t see that dividend disappearing.
The bank is well diversified, it’s expanding, and it’s not in any truly dangerous situations. Further, it has an attractive price and a lucrative dividend. I would suggest you wait for the price to drop a little bit more and then start your position.
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 Jacob Donnelly has no position in any stocks mentioned.