Shares of Royal Bank of Canada (TSX:RY)(NYSE:RY) are catching a bit of a tailwind recently and dividend investors are wondering if the pullback is finally over.
The stock has risen more than 5% over the past two weeks after hitting lows not seen since last October. Investors have been cautious on all the Canadian banks for most of this year as concerns build around the weakening state of the economy and the potential impact on the country’s housing bubble.
Let’s take a look at the current situation to see if this is a good time to start a position in Royal Bank.
Earnings
Royal reported record earnings when it released its Q2 results on May 28. Adjusted net income hit $2.4 billion in the quarter, a 9% increase over the same period last year.
Canadian banking remains the backbone of the business, representing 63% of the latest quarter’s earnings. Royal’s international operations delivered 18% of earnings and the remaining 19% came from the U.S. division.
This diversity is important given the headwinds facing the bank in the Canadian retail sector and the fact that some of the business units can be volatile from one quarter to the next. When we drill down into the distribution by segment, we see the true variety of the revenue streams.
A full 51% of earnings still came from personal and commercial banking activities in Q2, but the rest was spread out well across the other segments. Capital markets accounted for 24% of overall earnings and wealth management contributed 11%. Royal has built up a substantial insurance division over the past few years, and while it had a rough quarter, it still accounted for 8% of the company’s profits. Investor and treasury services round out the mix with a 6% contribution.
Earlier this year, Royal announced a US$5.4 billion deal to purchase City National Corp., a California-based asset management and commercial banking company. The acquisition will give Royal a strong platform to build its wealth management activities south of the border, and investors should see this area of the business become more important in the coming years.
Dividend growth
Royal increased the annualized dividend by eight cents earlier this year when it reported Q1 2015 results. The current distribution of $3.08 per share yields about 4%. Investors should take the hike as a signal that management is comfortable with its earnings outlook despite the challenging market conditions.
Risks?
Royal bank is well capitalized with a Basel III common Equity Tier 1 ratio of 10%. This is important because it indicates the bank’s ability to survive a strong financial shock.
In Canada, concerns are mounting around the effects of the oil rout on the Canadian economy.
Royal’s wholesale oil and gas exposure represents about 1.5% of its total loan book and Alberta accounts for 15% of the Canadian residential mortgage portfolio. As of May 28 the company said it had not yet seen any significant credit weakness in either the wholesale or retail loan portfolios.
Should you buy Royal Bank?
Royal trades at an attractive 11.2 times forward earnings. The stock has been a fantastic builder of wealth for decades and investors with a long-term outlook should be comfortable buying the stock right now.
