Canadians are looking for top stocks to help them meet their retirement goals.
Royal Bank generated nearly $10 billion in profit last year. That’s pretty impressive given the economic headwinds facing the Canadian banks.
This year the good times continue to roll, and the bank is on track to surpass last year’s results.
For fiscal Q2 2016, net income was $2.573 billion, up 5% compared with the same period in 2015. Net income for the first half of the year came in above the $5 billion mark.
The company’s success lies in its diversified revenue stream, with strong contributions coming from personal and commercial banking (52%), capital markets (23%), wealth management (13%), and insurance operations (7%). The remaining 5% comes from investor and treasury services.
Royal Bank is looking to the U.S. to help drive future growth. The company spent US$5 billion last year to buy California-based City National, a private and commercial bank that caters to wealthy clients.
The move positions Royal Bank well to expand its presence in the sector, and more deals could be in the cards in the coming years. City National contributed $66 million to wealth management earnings in the second quarter.
Royal Bank has a strong history of dividend growth. The company has raised the payout nine times in the past five years, and investors should see steady increases continue in step with stronger earnings.
The current quarterly distribution of $0.81 per share yields 4.1%.
Bank investors are watching the energy sector and the overheated housing market for signs of trouble.
Less than 2% of Royal Bank’s total loan book is directly exposed to oil and gas companies. Loss provisions have increased across the industry this year, but most of the Canadian banks say the worst is probably over.
As for housing, Royal Bank finished Q2 2016 with $275 billion in Canadian residential mortgages. That’s a big number, but 46% of the loans are insured and the loan-to-value ratio on the remainder is 54%. This means house prices would have to fall significantly before Royal Bank takes a material hit.
Should you buy?
Royal Bank has been a great builder of wealth for long-term investors, and there is little reason to believe the trend will change.
The stock isn’t as cheap as it was earlier this year, but investors who buy today are still getting the bank for a reasonable 12 times trailing earnings and can collect an attractive dividend.
If you want a name you can simply buy and forget about for two or three decades, Royal Bank remains an attractive RRSP pick.