Royal Bank (TSX:RY): Does Big Equal Best?

Royal Bank of Canada is trading slightly above intrinsic value. I would avoid the stock in your RRSP or TFSA for now.

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Royal Bank (TSX:RY)(NYSE:RY) provides diversified financial services including personal and commercial banking, wealth management, insurance, investor and treasury services and capital markets products to domestic and international customers.

It is a Schedule 1 Bank under The Bank Act (Canada) and its corporate headquarters are in Toronto, while its head office is in Montreal. The company reports a market capitalization of $148.63 billion with a 52-week low of $92.26 and a 52-week high of $109.68.

Based on my calculations, using a comparable company analysis (CCA) model, I determined that Royal Bank has an intrinsic value of Royal Bank (TSX:RY): Does Big Equal Best?$102.06 per share.

At the current share price of $103.17 I believe Royal Bank is slightly overvalued. Investors looking to add a bank stock to their RRSP or TFSA should follow Royal Bank’s stock through 2020, as a market contraction could push the share price below intrinsic value, which presents an opportunity to buy.

Royal Bank has an enterprise value of $135.3 billion, which represents the theoretical price a buyer would pay for all of Royal Bank’s outstanding shares plus its debt.

Financial highlights

For the fiscal year ended October 31, 2019, the company reports a strong balance sheet with $56 billion in retained earnings, up from $51 billion the prior year. This is a good sign for investors, as it suggests the company’s surpluses in previous years have been reinvested to fuel growth.

With goodwill of $11.2 billion, intangible assets of $4.7 billion and shareholders’ equity of $83.6 billion, Royal Bank reports a tangible net worth (shareholders’ equity minus goodwill minus intangibles) of $67.7 billion, which is very good.

Tangible net worth (TNW) represents the real value of the company and Royal Bank’s increasing retained earnings will subsequently grow TNW, which is a good sign.

Total revenues are up materially to $46 billion, from $42.6 billion in 2018 (+8%), largely driven by an $8 billion increase in interest and dividend income. Given an increase in expenses, Royal Bank reports pre-tax income of $15.9 billion, up slightly from $15.8 billion in 2018.

It should be noted that Royal Bank has increased its provision for credit losses to $1.9 billion, from $1.3 billion in 2018. This suggests that the bank anticipates increasing defaults in the coming year, which is not a good sign.

From a cash flow perspective, management takes a proactive approach to debt management as indicated by the issuance of $1.5 billion of debentures, offset by the $1.1 billon repayment of debentures.

The company has a normal course issuer bid (NCIB) in place, whereby it repurchased and cancelled $1 billion of common shares, down from $1.5 billion in 2018.

Royal Bank is a dividend paying entity with a current yield of 4.07% achieved through quarterly payments of $1.05 per share.

Foolish takeaway

Investors looking to buy shares of a bank should consider adding Royal Bank to their RRSP or TFSA watch list.

With positive retained earnings and consistent net income, Royal Bank is a financially stable company, which will deliver good returns to shareholders in the future.

At its current price of $103.17 at writing, I believe Royal Bank is trading slightly above its intrinsic value of $102.06.

I advise interested investors to follow the stock into 2020 and wait for an opportunity to buy shares at less than intrinsic value.

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 Chen Liu has no position in any of the stocks mentioned.

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