RBC (TSX:RY) Reports Huge Profits: Will Dividend Restrictions Lift Soon?

The Royal Bank of Canada stock remains a superior investment than most TSX assets even if relinquished the throne to a tech giant. Investors look forward to higher payouts once the OSFI lift restrictions on dividend hikes.

| More on:
Piggy bank next to a financial report

Image source: Getty Images.

Royal Bank of Canada (TSX:RY)(NYSE:RY) relinquished the throne to Shopify in 2020. Canada’s largest bank is now second fiddle to the tech phenomenon as the largest publicly listed company on the TSX. However, it doesn’t mean it’s an inferior investment to the e-commerce platform.

On the contrary, many income investors would pick RBC over Shopify any time of the day. Furthermore, if you have both and the market tanks, you’d sell the tech superstar instead of the blue-chip stock. The $185.41 billion bank has, for decades, displayed resiliency and stability in the most trying times.

In its recent quarterly report, RBC posted huge profits. Investors look forward to lifting dividend increase restrictions by the Office of the Superintendent of Financial Institutions (OSFI). The bank has more than enough capital to hike dividends and reward loyal investors.

Surge in profit

In Q3 fiscal 2021 (quarter ended July 31, 2021), market observers didn’t expect the 34% increase in net income versus Q3 fiscal 2020. Management even released more than $500,000,000 in rainy-day funds during the quarter. RBC’s net income surged, despite the 1% year-over-year drop in revenues.

RBC, along with the other big banks, increased the provision for credit losses (PCLs) significantly at the onset of the pandemic. All of them anticipated their loan portfolios to deteriorate and delinquency buckets to overflow. In Q2 fiscal 2021, RBC released $96 million from its PCLs then $540 million in the next quarter.

Diversified businesses

RBC’s president and CEO Dave McKay credited the bank’s diversified businesses and disciplined approach to risk and cost management underpinned for the impressive quarterly results. The core personal and commercial banking unit posted the highest surge, with profit soaring 55% to $2.1 billion.

RBC’s capital markets division saw a 19% year-over-year net income growth. It was also a record revenue for the corporate and investment banking unit. Meanwhile, the Canadian banking division posted an 8% growth due to increased lending activity. Even the balance of residential mortgages climbed 13% from a year earlier to $320.1 billion.

OSFI had to impose a ban on share buybacks and dividend increases to preserve the banking sector’s strength and maintain capital cushion. RBC’s Common Equity Tier 1 ratio improved to 13.6% compared to 12.8% in the previous quarter. Analysts believe OSFI will lift restrictions later this year.

Stock performance

RBC’s total return in the last 48.77 years, the total return is 47,787.14% (13.49% CAGR). As of September 7, 2021, the share price is $129.95 — a 28% year-to-date gain. The share price sunk to as low as $67.80 on March 23, 2020, during the height of the market selloff.

However, RBC eventually recovered to end the year at $95.48 or 41% higher than its COVID low. Investors did not lose, too, and relished the 7% total return in 2020. Remember, the bank’s dividend track record is among the longest in the TSX. Its first dividend payment was 151 years ago.

Widespread expectation

After Q2 fiscal 2021 and the lack of dividend growth last year, the widespread expectation is that a dividend increase, possibly in the double digits, is forthcoming. In the back of half 2021, tailwinds have replaced headwinds. Royal Bank of Canada is well positioned to grow its profits further, and, therefore, a yield hike is justifiable.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify.

More on Dividend Stocks

grow money, wealth build
Dividend Stocks

2 Ultra-High-Yielding TSX Stocks to Buy With $1,000

You don’t need thousands to start investing. Here are two super high-yielding TSX stocks to buy now that can provide…

Read more »

Business success with growing, rising charts and businessman in background
Dividend Stocks

How to Turn $15,000 Into Reliable Passive Income for Decades

If you only have $15,000 to invest today, here’s a mini portfolio that could produce passive income annually (and potentially…

Read more »

man slides
Dividend Stocks

TFSA Investors: Where to Put That New $6,500 Contribution Room

These stocks may be trading high, but they still offer value for TFSA investors seeking out the best stocks to…

Read more »

Dividend Stocks

2 TSX Companies With Dividends That Outpace Inflation

The stellar yields of these Canadian dividend stocks make them an attractive investment amid a high inflationary environment.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

1 Overlooked Dividend Stock (Yielding 5.6%) to Buy in January 2023

Great-West Lifeco Inc. (TSX:GWO) is an underrated dividend stock that warrants the attention of investors in early 2023.

Read more »

stock analysis
Dividend Stocks

1 Oversold Dividend Stock (Yielding 3.24%) to Buy in January 2023

Looking for a deal? This dividend stock is still near oversold territory, with a dividend I'd lock up right now.

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

5 Top Dividend Stocks to Buy With Decades of Passive-Income Potential

Any Canadian investor can enjoy passive income from these dividend stocks that tend to increase their payouts over time!

Read more »

value for money
Dividend Stocks

3 TSX Stocks That Are Too Cheap to Ignore

You can buy cheap TSX stocks such as Suncor and Nuvei right now to enjoy outsized gains once the markets…

Read more »