Royal Bank of Canada (TSX:RY)(NYSE:RY) has pulled back in recent days, and investors who missed the run since January are wondering if this is a good time to buy the stock.
Let’s take a look at the financial giant to see if it deserves to be in your portfolio.
Earnings
Royal Bank continues to deliver solid results despite the headwinds facing the Canadian banks.
The company earned just under $10 billion in 2015, and the results for this year indicate things are rolling along quite well. Net income for Q2 2016 came in at $2.5 billion, up 3% compared with the same period last year.
The bank’s success lies in its diversified business model. Royal Bank relies on personal and commercial banking activities for about half of its earnings, but the company also has strong capital markets, wealth management, and insurance divisions.
Performance by any single group can vary from one quarter to the next, so the balanced model is important for ensuring steady results.
For example, the personal and commercial banking group delivered record earnings in Q2 2016. Insurance and wealth management also had strong quarters, while the capital markets segment posted results that were slightly lower than the same period last year.
Growth
Royal Bank recently purchased California-based City National for US$5 billion. The move is a big bet on the private and commercial banking opportunities in the United States, and the results are already turning up in the numbers.
City National added $66 million to Royal Bank’s Q2 wealth management earnings, and the division should be a strong performer in the coming years.
Dividends
Royal Bank has a solid track record of dividend growth. The stock currently pays a quarterly distribution of $0.81 per share for a yield of 4.3%.
Risks
Sky-high housing prices and troubles in the energy patch have some pundits concerned the Canadian banks are in for a rough ride.
Royal Bank has certainly increased its provisions for bad loans to oil and gas companies, but the direct exposure to the sector represents less than 2% of the company’s total loan book, so the situation is manageable.
On the housing front, Royal Bank finished Q2 2016 with $275 billion in Canadian residential mortgages. The insured component represents 46% of the portfolio and the loan-to-value ratio on the remaining loans is 54%. This means the housing market would have to correct significantly before Royal Bank sees a material hit.
Should you buy?
Royal Bank has proven to be a great long-term holding for many investors, and the trend is likely to continue. If you have a bit of cash on the sidelines and are willing to ride out some short-term volatility, the latest pullback is probably a good opportunity to pick up the stock.
