Royal Bank of Canada (TSX:RY)(NYSE:RY) has made many of its long-term shareholders very wealthy.
With economic headwinds and technology threats on the horizon, new investors are wondering if this is the right time to add the bank to their dividend holdings.
Let’s take a look at the current situation to see if Royal Bank is still a top pick.
Housing risks
Sky-high Canadian house prices are a point of concern for Canadian bank investors. Reports from respected think tanks and international organizations repeatedly warn that Canada’s housing market is overvalued. The extent of the bubble is debatable, with predictions for a pullback ranging from 10-50%.
Royal Bank wrapped up its third quarter at the end of July with $201 billion in residential Canadian mortgages on the books. The company said 40% of the portfolio is insured and the loan-to-value (LTV) ratio on the uninsured portion is about 55%.
Compared with its peers, Royal Bank’s uninsured mortgages represent a significant part of the portfolio, but the low LTV ratio takes out some of that risk.
If house prices pull back in a controlled way, Royal Bank is more than capable of managing the downturn. In fact, prices would have to drop significantly before the bank sees any material impact.
Royal Bank has a strong capital position with a CET1 ratio of 10.1%, which provides extra support in the event of a financial shock.
Energy risks
Royal Bank has about $7.5 billion in exposure to the oil and gas industry. Wholesale loans to the sector represent 1.6% of the overall loan book, and management says it isn’t seeing any significant trouble in the portfolio.
If energy prices continue to slide, loss provisions will creep up, but the impact should be minimal.
Technology threats
Financial technology (FinTech) is causing a lot of excitement these days as analysts and bank leaders try to determine how big a threat mobile payment players are going to be.
Royal Bank is investing heavily in people and partnerships to ensure it stays ahead of the FinTech curve. The threat is certainly real, but the Canadian banks have the financial means to stave off competition from Silicon Valley, and I think the majority of banking customers are going to take their time in adopting the new technologies.
Personally, I’m not all that comfortable with the idea of using my phone or watch to make hundreds of purchases every month, and I suspect I’m not the only one who feels that way.
Earnings and dividends
Royal Bank reported Q3 2015 net income of about $2.5 billion. Yes, that’s just for three months! The company might be facing a touch economic environment, but the numbers aren’t showing it.
Management even increased the quarterly dividend at the end of Q3 to $0.79 per share. That’s good for a 4.2% yield at the current stock price.
Should you buy?
Royal Bank has been around for a very long time. The company has survived the Great Depression, two world wars, and several stock market meltdowns. Threats are always going to be on the horizon, but the track record suggests the company will overcome them.
If you have a long-term investment outlook, I think Royal Bank is still a good pick for your dividend portfolio.
