Royal Bank of Canada (TSX:RY)(NYSE:RY) is a king among men in the Canadian banking scene. The premium bank isn’t just able to weather the macro typhoon that lies ahead; it can come roaring back when it’s time to recover. Its stellar fundamentals will keep it buoyed as market waters remain choppy through the year.
Don’t underestimate the power of the Canadian banks
Both the Canadian credit downturn and the coronavirus have made the big banks seem uninvestible at this juncture. It’s a bad place to be for the banks as they wake up to the reality of lower loan growth at lower margins while having to deal with a slew of souring loans.
Some of the Street’s biggest bears may even think that their dividends are in jeopardy. I don’t agree, given the banks aren’t at ground zero of the coronavirus crisis, as they were in the Financial Crisis. In fact, they’re much better capitalized this time around. I say the dividends could grow in an environment where cuts could become the norm.
The Canadian banks went into CET1 capital ratio territory following the Financial Crisis. Royal Bank’s 2019 12.1% capital ratio is at the high-end for the Big Six Canadian banks. Royal Bank trades at a premium to the other banks for a good reason. It has a solid loan book, an incredible structure, and is well-diversified. It has roaring wealth management and capital markets businesses that can do some of the heavy lifting as its banking segment looks to take a hit.
Royal Bank stock: a rough road ahead
Looking ahead, impaired loans will likely lead to negative earnings per share (EPS) growth for the year before returning to positive. While Royal isn’t immune from the pressures that lie ahead, I think it will suffer the least damage. As the world returns to normal, it is in position to lead the upward charge.
Even if worse comes to worst, and the pandemic drags on through 2021, I don’t see Royal taking the axe to its dividend. Its earnings stream is stress-tested and will be able to cover the dividend while building further liquidity.
Just because the Canadian banks are destined for negative-to-flat earnings growth for the year doesn’t mean they should be ignored. Royal Bank trades at 1.5 times book and sports a 5.2% dividend yield. This is crisis-level pricing that I suspect won’t be around when the economy gets back on the road to recovery.
Even in a worst-case scenario, Royal is a cream of the crop play that can hold its own. That’s not to say that the stock can’t retest its March 23 lows. So, you should seek to average down on the name, rather than initiating a full position at today’s prices.
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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 Joey Frenette has no position in any of the stocks mentioned.