Is Royal Bank of Canada Still a Good Buy After its Abysmal Earnings Report?

Royal Bank of Canada (TSX:RY)(NYSE:RY) had an ugly Q4 2016,. The company missed analyst expectations by a whopping $0.07. Earnings per share dropped to $1.65 from $1.74 in the same quarter last year, and the bank cut its target following the disappointing earnings announcement.

This is the biggest bank of the Big Five and a core holding of many Canadian long-term investors because of its safety and high dividend yield, but after such an abysmal earnings report, is this stock going to pull back further, or is this simply a buying opportunity for value investors?

The stock dropped a whopping 3.37% on Wednesday as CEO Dave McKay announced that the company downgraded its return on equity (ROE) target from 18% to 16%. The lower ROE target was due to pressure caused by low interest rates combined with a large amount of uncertainty regarding regulatory requirements. McKay also stated that the new target will give Royal Bank of Canada more flexibility to grow its business abroad.

I don’t buy the excuses. All of the Canadian banks are in the same boat regarding low interest rates. While McKay tried to put a positive spin on the downgrade, I believe the company’s risk-management team isn’t doing the best job that they could be doing in the current economic environment.

Warren Buffett loves using the ROE of a company to determine whether or not its a business worth owning for the long term. The ROE is a very important measurement of how well a company can use a shareholder’s capital to turn into profits. A downgrade of 2% may not seem like much to the average investor, but I think this target downgrade is a much bigger worry than the earnings miss reported in this quarter.

Because of the missed earnings and the ROE downgrade, I believe the stock has further room to decline from here, but I also think the company is still a terrific forever stock for dividend investors. Following the quarter, I think the stock will pull back to lower levels, but value investors should start buying the stock once the dividend yield goes back above 4%.

The stock quite cheap right now, but it’s going to get a lot cheaper by the conclusion of 2016. If you’re a value investor looking to add a terrific forever stock that pays a safe and growing dividend, then look no further than Royal Bank of Canada.

The stock trades at a 13.1 price-to-earnings multiple with a 2.1 price-to-book multiple, both of which are in line with its five-year historical average values of 12.7 and 2.2, respectively. The dividend yield is also quite bountiful at current levels–a very fat 3.81%.

I believe it’s very possible that the stock could drop around the $80 level and yield over 4%. When it does, it would be a wise decision to pick up the stock at a huge discount to intrinsic value, because a 16% ROE is still very impressive.

How 1 Man Turned $10K Into Over $8 Million

Discover how one man turned a modest $10,600 investment into an $8,016,867 fortune.

Learn more about this man and how you can start down the path toward financial independence.

Simply click here to learn more

Fool contributor Joey Frenette has no position in any stocks mentioned.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.