Although the Canadian banking sector is still a stalwart in many investor portfolios, it seems as if the sector is losing some of its lustre.
Personally, I think a lot of this is from short-term investors who don’t like the bank stocks 6-12 months out. These folks do have a point; factors like a tepid Canadian economy and projected low mortgage growth will likely continue to weigh on results. Analysts are predicting some growth in the bottom line, but nothing too exciting.
I’m the first to admit there are serious headwinds working against the banks in the short-term, issues that could get even worse if the Canadian economy plunges into a recession. But investors need to forget about that and look at the long-term. As long as you continue to be bullish on Canada, there’s no reason why our bank stocks won’t continue to be great investments.
Why Royal Bank?
Some investors don’t care about the perceived quality of the banks, arguing that each of the “Big Five” Canadian banks are a great investment capable of delivering outsized returns.
While I agree with that sentiment, I still think it’s a good idea to pay up a little bit for quality. In the banking sector in Canada, there’s one clear winner — and it’s Royal Bank.
The company is number one or number two in seemingly every important banking category. Its mortgage division continues to post solid numbers. Its credit cards offer compelling value. Royal’s wealth management division has quietly carved out a good market share. Heck, even the bank’s insurance business has grown into a formidable force.
Investors often forget Royal Bank has robust international operations as well, with some 40% of revenues coming from outside Canada. In the United States, Royal has focused on commercial and high-net-worth clients and should continue to post solid gains from these assets. The company also has significant banking assets in the Caribbean, and its capital markets division has a presence around the world. These growth markets should continue to serve the company well over the long term.
Royal Bank has paid investors an uninterrupted dividend since the 1800s. The payout has steadily grown over the years with the current dividend yield at 4%. With a targeted payout ratio of approximately 50% of earnings, investors don’t have to worry about the security of the dividend. Even if we get a nasty recession.
Terrific long-term returns
Royal Bank has been a terrific investment over the last two decades, delivering consistent returns, despite the 2008-09 financial crisis.
Including reinvested dividends, Royal Bank shares have returned 13.69% annually over the last 20 years. That’s enough to turn a $10,000 original investment made back in December 1999 into something worth more than $130,000 today.
Oh, and thanks to Royal Bank’s generous policy of raising dividends, that original $10,000 investment would be spinning out more than $5,260 each year in dividends.
There’s no guarantee Royal Bank can deliver that kind of performance going forward, of course. But if it does, someone who buys shares today will be sitting on a yield on cost of more than 50% just two decades from now.
The bottom line
There’s a reason why Royal Bank is widely considered to be the finest financial institution in Canada. It offers investors a dominant position in Canadian banking, interesting growth opportunities in other countries, a fantastic history of dividends, and, perhaps most importantly, absolutely terrific long-term returns.
If you don’t buy shares today, you’ll regret it later. So, what are you waiting for?
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Fool contributor Nelson Smith has no position in any of the stocks mentioned.