The shares of Royal Bank of Canada (TSX: RY)(NYSE: RY), the nation’s largest bank, have done nothing for investors this year.
Its shares are trading where they were at the start of this year, despite the fact that the economy is accelerating at a pace no one had predicted.
Generally, with strengthening economic growth and rising interest rates, banks fare well. In an environment of growth, companies borrow more for expansion, delinquencies decline, and banks make more money on lending.
It seems investors have ignored all of these good factors that are supporting the Canadian banks and have fixated on the housing market which is going through a correction phase in the nation’s largest city, Toronto.
Here are the top three reasons which I think make a good case for investing in RBC stock if you focus on its income potential and strong fundamentals.
Dividend growth
RBC is one of the best dividends payers in Canada. There is no doubt that investors are disappointed when they see their holdings have shown no gains in 2017. But as the stock price is stuck in the mud, RBC’s dividend is constantly rising over the past many years.
While announcing the third-quarter earnings results, RBC also raised its quarterly dividend by 4.6% — its second hike this year following a 4.8% increase in February. With an annual dividend yield of 4%, RBC now pays a quarterly dividend of $0.91 per share.
After the company’s recent dividend hikes, it’s now on track for the seventh consecutive year in which it has raised its annual dividend payment. And this hefty dividend payout isn’t compromising the bank’s growth potential because it has a very manageable dividend-payout ratio of 40-50% of its net income.
Bright earnings outlook
RBC’s third-quarter earnings report showed that the lender is benefiting from Canada’s strong economic fundamentals.
In the latest quarter, RBC reported a 5% increase in its net income to $2.8 billion, while earnings per share grew even stronger, posting a healthy 8% increase. Its three out of four business units posted strong growth, led by its wealth management division.
Going forward, the Bank of Canada’s drive to hike interest rates and RBC’s strong U.S. operation should fuel further growth in its profitability.
Attractive valuations
Many analysts believe that banking stocks in Canada have compelling valuations, and investors aren’t paying attention.
RBC currently trades at 12.5 times of its 2017 estimated EPS and only 11.9 times of its fiscal 2018’s estimated EPS. These multiples are cheaper than the bank’s historical average.
So, if you’re a long-term income investor and are looking for a good stock with the potential to boost your dividend income, then RBC is the top banking name for you to consider.
