Let’s take a look at the current situation to see if Royal deserves a spot in your dividend portfolio.
The continued weakness in Royal’s stock has been somewhat of a surprise, given the strong earnings performance in Q1 2015. The bank delivered record earnings of $2.4 billion, a 17% gain over the same period in 2014.
The company received about 51% of its earnings in the past twelve months from personal and commercial banking activities. Capital markets delivered 23% of profits and wealth management earnings accounted for 12%. Royal has a large insurance business that chipped in 9% and the company’s activities in investor and treasury services made up the rest.
Royal recently announced an agreement to acquire City National Corp. for US$5.4 billion. The purchase of the California–based private wealth and commercial banking firm provides Royal with a strong platform to expand its U.S. wealth management business. Investors should view the deal as a positive move that will help Royal balance out the headwinds facing its retail operations.
Royal just increased the annualized dividend payout by eight cents. The new distribution of $3.08 per share yields about 4%. The company has a 10-year annualized dividend growth rate of nearly 11%. Investors should continue to see yearly gains in the payout, but the growth rate will probably slow down.
Risks for bank investors
Buying Canadian bank stocks has pretty much always been a slam-dunk investment decision, but that might not be the case moving forward.
In recent months, the market has been concerned about the impact the oil crisis will have on bank earnings. So far, Royal’s loss provisions on its cards, loans, and mortgages remain at low levels and the company has a very healthy capital position, but investors will have to watch the quarterly numbers carefully for signs of trouble.
Royal finished the first quarter with $194 billion in Canadian residential mortgages. About 60% of the portfolio is uninsured and 19% of the mortgages are located in Alberta.
Royal’s energy exposure only represents about 1.5% of the total loan book. The company has stress-tested its wholesale-and-retail-lending portfolios against $45 oil and difficult conditions in both the Alberta economy and the national housing market. As of the Q1 2015 conference call, Royal believes the potential losses are manageable.
Royal appears well positioned to ride out the economic headwinds, but management is concerned about another threat. Big tech companies are making a strong push into financial services and capitalizing on the growing popularity of mobile banking.
At a recent conference with investors and clients, CEO Dave McKay said the bank is on a “collision course” with some of the world’s largest tech companies.
In order to stay ahead of the game, Royal is investing heavily in digital technologies, but investors should keep an eye on the changes in the market.
Should you buy?
Royal currently trades at a reasonable 11 times forward earnings and two times book value. The company’s diversified business model and strong capital position should enable it to weather the storm in the Canadian market, but the heavy focus on capital markets and wealth management also increases the risk profile due to the higher volatility in these activities. The shares are fairly valued so I would consider Royal Bank of Canada a hold right now.
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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.