The Motley Fool

2 Reasons to Buy Royal Bank of Canada

Royal Bank of Canada (TSX:RY)(NYSE:RY) is one of the largest banks in Canada, part of the “Big Five” that investors are constantly looking to buy and hold. There are two primary reasons, in my opinion, that investors should want to own Royal Bank of Canada.

Growing earnings

At the end of February, the bank released its Q1 2017 results, and I was quite impressed. Net income for the quarter was a little over $3 billion, which was up $580 million, or 24%, from Q1 2016. And compared to Q4 2016, its net income was up $484 million, demonstrating that the bank is not only beating its numbers from a year ago; it’s also seeing escalating growth quarter over quarter.

The big driver of this growth was the personal and commercial banking division, which saw net income grow by $302 million or 23% year over year. The net income of $1.59 billion would have been even higher, but it had higher costs to support business growth in its Caribbean and United States operations. Nevertheless, a 23% improvement is absolutely incredible.

Wealth management brought in $430 million — up $127 million or 42% year over year. Royal Bank thanked higher interest income along with higher fee-based income for its clients and increased transaction fees. When a client trades a stock through Royal Bank, the bank generates money. Investor and treasury services saw 50% growth in net income to $214 million, and its capital markets division saw growth of 16% to $662 million.

One final statistic that leaves me particularly excited is that its return on equity (ROE), one of the strongest determinations of a bank’s strength, increased significantly. Year over year, ROE grew by 140 basis points to 16.7%. And even compared to last quarter, it grew by 120 basis points from 15.5%. The higher ROE goes, the better the investment for you.

Dividends and share buybacks

When a company grows its net income by 24% year over year, investors are entitled to an increase in the dividend. Royal Bank doesn’t disappoint.

Last year, it increased the dividend twice for an annual growth rate of 5%. And after this announcement, management increased the dividend by an additional 5%. Although it might not seem like a lot, these yearly increases are more than inflation and, with the compounding effect, can have a significant impact on your portfolio over the long term.

Further, the company is buying back a significant number of shares. Royal Bank announced it would be buying up to 30 million shares, or about 2% of the float, between now and March 2018. By canceling those shares, every current shareholder essentially becomes a bigger holder of the company. Further, the earnings per share increase, and the amount the company has to pay out in dividends decreases, making future dividend increases likely.

Fundamentally, the Big Five are great investments. Royal Bank of Canada is one of the best for many reasons, but two in particular are its continued growth in earnings and a lucrative dividend and share buyback strategy.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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