TFSA Investors: Is Royal Bank of Canada (TSX:RY) a Cheap Stock?

Royal Bank of Canada (TSX:RY) (NYSE:RY) just reported steady results in a turbulent market. Is it time to buy the stock?

| More on:
question marks written reminders tickets

Image source: Getty Images

Canada’s largest bank recently reported decent fiscal Q3 2019 earnings results, and investors are wondering whether this is the right time to add Royal Bank of Canada (TSX:RY)(NYSE:RY) to their TFSA portfolios.

Earnings

Royal Bank generated net income of $3.3 billion in the most recent quarter, representing a solid 5% gain compared to the same period last year. Earnings per share rose 6%.

The bank gets revenue from a number of segments in the financial sector.

Royal Bank’s personal and commercial banking operations put in a strong performance, with net income coming in at $1.664 billion, up 10% from the same period in 2018.

Wealth management net income jumped 11% to $639 million and insurance net income hit $204 million, rising 29% from the same quarter last year.

Net income in the capital markets segment slipped 6% to $653 million due to lower syndication revenue in the United States and Europe. This division tends to see more volatility in earnings from quarter-to-quarter, so the dip isn’t something that should raise an alarm for investors.

Finally, the investor and treasury services group saw net income fall by 24%, or $37 million compared to Q3 last year. Client deposit margins, revenue from asset services, and funding and liquidity revenue all fell.

The steep decline is worth watching to see if it carries through to the next quarter, although the segment is a small contributor to overall revenue and net income.

The bank has previously indicated it is targeting annualized earnings-per-share gains of 7-10%. We will see how the final quarter pans out, but diluted earnings on a per-share basis are up 5% to this point in the fiscal year.

Royal Bank’s return on equity remains strong at 16.7%.

Risks

Ongoing uncertainty with Brexit and the trade dispute between the United States and China are worth considering when evaluating Royal Bank and other stocks in the sector. If the global financial market hits a rough patch, bank stocks will take a hit.

In addition, any downturn in the U.S. economy will have an impact on Canada, which could put pressure on the residential housing market. Royal Bank has a large mortgage portfolio, and while the bank is capable of riding out a downturn, an increase in unemployment could put a percentage of Canada’s highly leveraged households in a difficult situation.

Royal Bank has a strong capital position with a CET1 ratio of 11.9%, so it isn’t at risk of going bust. Broad-based weakness in the banking sector would nonetheless put pressure on the stock.

Dividends

On the positive side, Royal Bank just raised its quarterly dividend by 3 cents to $1.05 per share. It is the second increase in 2019, suggesting that management remains comfortable with the revenue and earnings outlook despite the potential economic headwinds.

At the time of writing, the dividend provides a yield of 4.1%.

Should you buy?

Royal Bank trades at $100 per share, or roughly 12 times trailing 12-month earnings. That’s not cheap, but it’s a reasonable price in the current environment given the company’s leadership position in the Canadian banking sector and its ability to ride out turbulent times.

The 12-month high is close to $107, so investors can pick up the stock at a bit of a discount right now and look to add to the position on any additional weakness.

I would prefer to see the share price retest the 2018 low near $90, but waiting for that to happen could result in missed dividends and potential lost upside on a surprise rally.

If you are a buy-and-hold investor searching for a reliable dividend-growth stock for your TFSA, Royal Bank should be a solid pick today. Buying the stock on any dip has historically proven to be a profitable strategy.

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 Andrew Walker has no position in any stock mentioned.

More on Stocks for Beginners

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

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 »

edit Sale sign, value, discount
Stocks for Beginners

These 3 Growth Stocks Are on Sale and Set to Surge

Some growth stocks are on sale right now that offer massive long-term potential for investors. Here's a trio to consider…

Read more »

Plane on runway, aircraft
Stocks for Beginners

Up 53% From its 52-Week Low, Is Cargojet Stock Still a Buy?

Cargojet (TSX:CJT) stock is up a whopping 53%, nearing closer to 52-week highs from 52-week lows, so what's next for…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »