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