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Royal Bank of Canada’s Growth Initiative Could Drive Long-Term Profitability

Royal Bank of Canada (TSX:RY)(NYSE:RY) is the largest Canadian bank by market cap and is a core holding for many Canadian investors. The company has a terrific history of growing its dividend, and long-term investors can expect more of the same going forward.

The management team had recently announced plans to increase its technology budget in order to focus on innovation in order to better serve customers while boosting margins as we enter an age where digital banking has become the norm.

Will this growth initiative make Royal Bank of Canada a force to be reckoned with?

The company used to have 80% of its technology budget allocated for maintaining old legacy systems. Going forward, the management team hopes to allocate 60% or less of this budget for legacy system maintenance. There’s no question that it’s very expensive to maintain an old system, and it simply doesn’t make sense to keep spending large sums of money on something that won’t spur long-term growth.

The management team is investing in initiatives that will allow the legacy systems to be run at a lower cost, and it’s estimated that 20% of the technology budget will be saved. This technology budget will go directly towards innovative growth initiatives, such as artificial intelligence and blockchain, which could be a game changer as we head into the digital age.

The company has also been looking for opportunities to grow in the U.S. This is a terrific growth initiative considering how much stronger the American economy will be under President Trump’s new policies, which are great for businesses within the U.S.

Royal Bank of Canada acquired a California-based bank City National last year for US$5 billion. The acquisition gives Royal Bank of Canada a strong position in the U.S., which is expected to get even larger as the company expands beyond its borders.

Royal Bank of Canada had a fantastic 2016, when it had a 26.92% gain. The stock is at all-time highs right now, but is there any upside left for 2017 and beyond?

The stock currently pays a 3.53% dividend yield, which is slightly lower than the company’s historical yield of 3.7%. The price-to-earnings, price-to-book, and price-to-sales multiples are at 13.8, 2.2, and 3.6, respectively, all of which are in line with the company’s historical average multiples of 12.3, 2.2, and 3.1, respectively.

The company is fairly valued right now, and there’s room for dividend growth for many years to come thanks to the management team’s growth initiatives. There’s still room to run in 2017, but I wouldn’t expect the returns of the same magnitude as last year.

If you’re looking for a terrific bank with great growth prospects, then Royal Bank of Canada may be the one. The stock doesn’t offer huge value anymore though, so I would be patient and wait for any dips before buying.

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

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