Royal Bank of Canada (TSX:RY)(NYSE:RY) stock surged last Wednesday after delivering a blowout quarter that beat street expectations on the bottom line ($2.20 diluted earnings per share, up from $1.88 year over year, and beating the consensus estimate of $2.12).
Net income surged 15% thanks to higher interest rates and the positive effects of Trump’s U.S. tax corporate tax cuts. The bank’s stock soared to end the day up 2.73% while bringing up its Big Five peers considerably after a nasty past few weeks of selling activity.
Behind the beat
The results were solid thanks mainly to the company’s retail banking and wealth management businesses, which did some heavy lifting for the quarter. While the growth numbers warranted a big rally, management’s guidance is what served as rocket fuel for the banks on a relief rally day for the broader markets.
Management noted that it expects margins to further improve in 2019, and according to CIBC Capital Markets, the “underlying business trends were solid and in line with what are always high expectations.”
As you no doubt have already realized, this third quarter has been all about the forward-looking guidance, and not about the actual quarterly results that’ve been clocked in. (maybe Warren Buffett was right when he advocated against giving guidance?) So, the peachy outlook provided by Royal Bank of Canada’s management team definitely triggered the wave of optimism that spread throughout the Canadian banking scene on Wednesday.
Looking ahead, the wealth management segment looks like it could continue to command massive ROE numbers that’ll help propel the company’s overall efficiency metrics. Moreover, I’m a raging bull on the bank’s U.S. growth plan, which will be a major source of growth over the foreseeable future as U.S. economic growth continues to be robust relative to the domestic market.
Even after the near 3% single-day rally, I think the bank’s stock is ripe for adding to your TFSA. The stock is still down 12% from its all-time high at the time of writing, the dividend yield is around 0.5% higher than it is typically at 4%, and the stock is still undervalued in spite of the incredible growth numbers that the company continues to record in spite of crude Canadian fears that have shaken up the TSX of late.
Royal Bank stock trades at a 10.9 forward P/E, a 1.9 P/B, a 3.3 P/S, and a 4.7 P/CF, most of which are higher than the company’s five-year historical average multiples of 12.5, 2.2, 3.3, and 5.2, respectively.
Even in these uncertain and turbulent times, you’re going to want to own Royal Bank at your TFSA’s core, as it could make you a tax-free fortune over the long-term without requiring you to take on excessive amounts of risk.
A dividend aristocrat like Royal Bank of Canada will reward you with continuously growing dividend payments. Whenever you can grab such a quality dividend aristocrat at a slight discount, you should jump at the opportunity as Buffett has with his recent U.S. bank bets.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.