RBC Stock Price: Is Royal Bank of Canada (TSX:RY) a Buy?

With interest rates set to rise, could Royal Bank of Canada (TSX:RY)(NYSE:RY) be a buy?

| More on:
Bank sign on traditional europe building facade

Image source: Getty Images

Royal Bank of Canada (TSX:RY)(NYSE:RY) is a stock I have a brief but profitable history with. I bought it earlier this year when TSX banks were rallying and grabbed a quick 11% gain in a few weeks. Sensing more value elsewhere, I sold the stock and invested the proceeds in another stock.

It ended up being a mistake. The stock I bought with my RY sales proceeds went down 10%. I then sold that stock and bought into another Canadian bank: Toronto-Dominion Bank (TSX:TD)(NYSE:TD). TD Bank has since gone on to deliver solid returns for me.

As you might have guessed, TD Bank is my favourite Canadian bank stock right now. I’ve bought the stock three times now, and I may be going in for a fourth buy shortly. But still, I think the Royal Bank of Canada is a pretty good investment. Trading at just 12 times earnings, it’s a classic value play that any income-oriented investor could make good money off.

Valuation

The core of any bullish thesis on Royal Bank–and Canadian banks in general–rests on valuation. Nobody argues that Canadian banks are likely to produce frothy growth, but they are pretty cheap relative to what growth they do have. Royal Bank of Canada is quite inexpensive, with metrics like:

  • Adjusted P/E: 12.3.
  • GAAP P/E: 12.5.
  • Price to sales: 3.9.
  • Price to operating cash flow: 3.8.

These are all pretty solid value metrics. In addition, the stock has a 3.85% dividend yield, which indicates that there’s a fair amount of dividend income to be had by buying it.

Growth

Next, we can look at Royal Bank’s historical growth and future growth prospects.

For the most recent 12-month period, RY’s revenue grew by 12.7%. Its earnings grew 36.4%. The strong growth for the trailing 12-month period is due to the economic recovery from COVID-19. The pandemic caused banks some trouble in 2020. This year, they are recovering from the damage they took last year. In other words, the 36.4% earnings growth isn’t as good as it looks: it reflects a bounceback from an extremely bad year.

Still, the 9% compound average growth in earnings isn’t bad at all. When you combine value, growth, and dividend yield, you’ve got the makings of a solid income play here.

Finally, there’s the matter of future growth. Canadian banks usually deliver “slow and steady growth,” which is to be expected because they collectively have saturated the Canadian financial services market. And there is one catalyst that could take growth higher: interest rate hikes. Banks earn higher profit margins on loans when interest rates go up.

If people keep taking out loans in a higher interest rate environment, bank earnings may rise. This isn’t guaranteed to happen: the higher rates could discourage borrowing. But the margins, at least, will rise. This is why bank stockholders should be optimistic that the Bank of Canada is set to raise interest rates. Banks are among the few classes of stocks that can gain from rate hikes.

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 Andrew Button owns shares of The Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

Silver coins fall into a piggy bank.
Tech Stocks

How to Turn a $500 TFSA or RRSP Into $50,000

Are you looking to convert a $500 TFSA into $50,000? A little discipline and patience can help you achieve it.…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

5 Things to Know About Cannabis Stocks Before 2023

Cannabis stocks like Canopy Growth (TSX:WEED) are struggling, but there are positives to draw on as well.

Read more »

STACKED COINS DEPICTING MONEY GROWTH
Stocks for Beginners

3 Best-in-Class Stocks to Build Long-Term Wealth

Looking for stocks that might create generational wealth over the long term? Here's a top growth, value, and income stock…

Read more »

TFSA and coins
Dividend Stocks

TFSA Couples: How to Invest for $777 of Passive Income Each Month

The TFSA or Tax-Free Savings Account can be used to buy and hold a portfolio of blue chip dividend stocks…

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Investing in the Stock Market Could Turn Your $1,000 Into $100,000: Here’s How

The stock market can convert a $1,000 regular investment into $100,000 without making too risky bets. Here’s a simple strategy…

Read more »

Bank Stocks

3 Top Stocks to Buy Now in a Once-in-a-Decade Opportunity

Given their discounted stock prices, these three quality stocks offer a once-in-a-decade buying opportunity.

Read more »

Various Canadian dollars in gray pants pocket
Stocks for Beginners

Here’s an Absolutely Brilliant Way to Earn Passive Income

Here’s a simple and unique way to earn passive income that does not involve working more, buying a property, or…

Read more »

Make a choice, path to success, sign
Stocks for Beginners

Canadian Investors: 2 Once-in-a-Generation Buying Opportunities

You can grab these two once-in-a-generation buying opportunities in Canada right now to get super rich in the long term.

Read more »