Royal Bank of Canada’s Top Portfolio Picks for 2017

Here’s a look inside Royal Bank of Canada’s (TSX:RY)(NYSE:RY) top Canadian picks for 2017.

The Motley Fool

Early in December the Royal Bank of Canada (TSX:RY)(NYSE:RY) published its Canadian equity focus list for 2017. In the report, the capital markets arm of Canada’s largest bank recommended to its institutional clientele to overweight consumer discretionary, consumer staples, and industrials, while underweighting utilities, telecoms, technology, and healthcare (see below).

And for those that are wondering why we should pay attention to these asset allocations, according to RBC, the focus list has returned, on average, 25% more than the TSX over the past five years. So while past results are not always indicative of future returns, I have summarized RBC’s top picks for your reference below.

focus-list-sector-allocations
RBC’s Focus List sector allocations (Source: RBC Capital Markets)
focus-list-stock-picks
RBC’s Focus list stocks. Note: cash was not included in the original report, but I’ve included it here as the weights only added to 95% (Source: RBC Capital Markets)

At the top of the list was Toronto-Dominion Bank (TSX:TD)(NYSE:TD), compromising 7.5% of the portfolio. RBC’s rationale to overweight its competitor follows the consensus bullish theme around TD’s U.S. banking segment, which RBC estimated will grow at 12% year over year from 2016 to 2018; and TD’s best-in-class Canadian banking segment is expected to grow 3% over the same period.

Along with TD, RBC has also recommended Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) and Intact Financial Corporation (TSX:IFC) from the financial sector. According to RBC, BNS’s current valuation is attractive when compared to its peers and is discounting its strong international growth prospects. As for Intact, the insurer was recommended due to the potential of P/BV expansion, and its defensive positioning given the insurance industry’s lower correlation to underlying economic conditions.

Aside from the financials, RBC focused on household names such as Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ). RBC recommended CNQ for a few reasons. First is its attractive free cash flow profile, which the bank estimated will hit $3.2 billion in 2017 and $4.6 billion in 2018, leading to balance sheet deleveraging. Second, the bank praised CNQ’s superior execution despite the oil downturn, its dividend growth, and the company’s near-term growth catalysts, such as its Horizon Oil Sands project.

While the aforementioned stocks are large-cap household names, RBC also recommended a few relatively less well-known mid-caps such as grocer Metro, Inc. (TSX:MRU) and industrial equipment and refrigeration supplier Toromont Industries Limited (TSX:TIH).

While traditional food retailers have had their market share stifled due to increasing competition, according to RBC, Metro has thrived thanks to brand loyalty and a focus on delivering fresh products. Moreover, RBC noted the company’s record of dividend increases and buybacks, while maintaining its relentless cost-containment measures.

Finally, the other mid-cap of the list, Toromont, was selected by RBC due to its historical earnings growth with a focus on efficiency, the potential to increase said earnings growth via acquisitions, and its consistent 20% return on equity despite a challenging environment in the dealership space. Furthermore, RBC also cited the company’s low level of debt as one of the catalysts that could drive acquisitions alongside its organic growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Alexander John Tun has no position in any stocks mentioned. Intact Financial is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »