Royal Bank of Canada (TSX:RY)(NYSE:RY) is a core holding in many portfolios, but new investors are wondering if a weakening Canadian economy and FinTech threats make the stock less attractive.
Let’s look at the current situation to see if Royal Bank is still a safe pick.
Earnings strength
Royal Bank continues to deliver solid earnings. Fiscal Q4 2015 net income came in at $2.593 billion, up 11% from the same period last year. Diluted earnings per share were $1.74, up from $1.57 a year ago.
Strong performances from the capital markets division and the personal and commercial banking segment helped offset weak earnings in insurance, wealth management, and investor and treasury services.
For the full year, Royal Bank booked net income of $10 billion, up 11% or a full $1 billion from 2014.
The diversified business model is enabling the company to navigate through some economic headwinds, and investors should see the positive results continue in 2016.
New investments
Royal Bank is betting big on wealthy Americans with its recent US$5 billion acquisition of California-based City National Corp., a private and commercial bank catering to high-net-worth customers.
The move surprised some people because Royal Bank’s previous foray into the U.S. market ended in failure. The company sold its struggling U.S.-based retail operations in 2011, taking a paper hit of $1.6 billion.
This time the focus is on the growing wealth management and commercial sectors. The City National deal comes at an important moment in the U.S. economic recovery as the Fed is just starting to raise interest rates, which should be positive for City National’s results.
The acquisition will further diversify earnings and help Royal Bank drive growth outside of the Canadian market.
Dividend growth
Royal Bank raised its quarterly dividend by 8% in 2015 to $0.79 per share. If the Canadian economy weakens further in 2016 and beyond, investors might see less aggressive hikes, but the payout should continue to grow. The current distribution offers a yield of more than 4%.
Digital challenges
Royal Bank is investing heavily in new technologies as well as partnering with tech companies to ensure it stays ahead of the digital banking curve.
Recent agreements include deals with Uber Canada and Airbnb Canada to offer RBC Rewards points to customers who pay for their purchases using the bank’s cards. Royal Bank is also making life easier for its customers by offering tap and mobile wallet technology.
Should you buy?
Royal Bank is a very profitable company with a strong management team and a powerful brand. Further weakness in the Canadian economy could put some pressure on earnings, but the long-term outlook remains positive and the stock is trading at a reasonable 11 times earnings. If you are looking for a safe buy-and-hold dividend pick, Royal Bank remains a solid choice.
