The coronavirus market crash is likely not over yet. The economic outlook looks very gloomy. Statistics Canada revealed that more than one million jobs were lost in March. And the unemployment rate jumped to 7.8%.
Banks are highly sensitive to the health of the economy. Therefore, investors should get another chance to buy Royal Bank of Canada (TSX:RY)(NYSE:RY) stock at a low over the next six months or so. Potentially, RBC stock can revisit the $70 to $78 level or get close to it.
Market crash: RBC stock is the most resilient
Royal Bank stock has been the most resilient of the Big Six Canadian banks during this market crash so far. The graph below shows the drawdown of the bank stocks since late February.
RY data by YCharts.
Although the big Canadian bank stocks move in tandem, RBC stock has fallen the least. The banking leader, in fact, has outperformed the worst performer by about 10%.
Market crash: Why buy RBC stock?
In this market crash, RBC stock is the best bank to own, particularly for conservative investors. Its diversified business is of high quality.
Royal Bank has been around for 150 years, helping families across generations with their financial matters. And it now serves in 36 countries with key businesses in Canada and the United States. Additionally, over time, it has extended its services to corporate, institutional, and high-net-worth clients.
The bank generates about 49% of its earnings from personal and commercial banking, 21% from capital markets, 20% from wealth management, 6% from insurance, and 4% from investor and treasury services. Royal Bank’s diversified earnings should allow it to generate more stable profits than its peers.
For example, strong fixed-income trading and corporate and investment banking results boosted its capital markets segment earnings by 35% in Q1 against the same period in the prior year. As another example, the bank is less affected by low interest rates than its peers because of its diversified business.
Dividend safety and valuation
Many dividend stocks have cut their payouts, but it’s highly unlikely for RBC stock to do so. In the past 10 years, it has increased its dividend at a compound annual growth rate of 7.4%.
Its payout ratio is expected to remain comfortably below 50% this fiscal year. So, it has the buffer to protect its dividend.
Let’s say the bank is extra cautious and decides to freeze its dividend (temporarily) instead of continuing to increase it, it’d still offer a yield of about 5% on a current multiple of about 9.6 times earnings.
This is a decent valuation to pay for a quality company to get a perpetual yield on cost of 5% or higher.
The Foolish takeaway
RBC stock posted strong Q1 results. Its net revenue, net income, and adjusted diluted earnings per share, respectively, climbed 10.8%, 10.7%, 11.4% against the year-ago period. However, the economic downturn will be a drag on the bank’s results for the remainder of the year.
Therefore, interested investors in RBC stock should wait for the bank to release earnings results for the next quarter or two to seek opportunities to buy on the market crash dips for long-term investment. This way, they can lock in a yield on cost of more than 5% for perpetuity in a quality global banking leader.
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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 Kay Ng owns shares of Royal Bank of Canada, The Bank of Nova Scotia, and The Toronto-Dominion Bank. The Motley Fool recommends BANK OF NOVA SCOTIA.