Royal Bank (TSX:RY) has seen its share price rebound in recent weeks. Investors who missed the rally are wondering if Royal Bank stock is still undervalued and good to buy for a retirement portfolio right now.
Royal Bank overview
Royal Bank is Canada’s largest company with a current market capitalization of roughly $185 billion. It is also one of the top 10 banks of the planet based on this metric.
Royal Bank gets is revenue from a number of segments. Personal and commercial banking generated 53% of fiscal 2022 net income. Wealth management added 20% and capital markets activities contributed 19%. The remaining profits came from insurance and investor and treasury services.
The bank built up excess cash during the pandemic and management is using the funds in 2022 to make strategic acquisitions. Royal Bank purchased a wealth management business in the United Kingdom for about $2.4 billion and just announced an agreement to buy HSBC Canada for $13.5 billion.
The HSBC Canada deal will add about 130 branches with an affluent client base.
Royal Bank 2022 earnings
The bank generated fiscal 2022 net income of $15.8 billion. This is down about 2% from 2021, so the company had a strong year, despite the economic challenges that emerged in recent months. Return on equity was a solid 16.4%.
Personal and commercial banking operations delivered a 7% gain in earnings compared to 2021. Wealth management earnings soared 20%. On the downside, capital markets earnings dipped 30% due to weaker investment banking activity. Insurance earnings slipped 4%.
Dividends
Royal Bank just increased the quarterly dividend by 3% to $1.32 per share. This is on top of a 7.5% increase earlier this year and the 11% hike investors received in late 2021.
At the time of writing, the new distribution provides an annualized yield of close to 4%.
Risks
Investors sold bank stocks this year amid rising fears that a recession is on the way in 2023. Royal Bank’s own analysts predict a short and mild downturn in the economy as a result of soaring interest rates and ongoing inflationary pressures.
The Bank of Canada and the U.S. Federal Reserve are trying to get inflation back down to a target rate of 2%. In order to do this, they are increasing interest rates to cool a hot economy and hopefully bring the jobs market back to a balanced position. Currently, there are too many job opening and not enough people looking for work. This forces businesses to increase wages to attract or retain employees. The higher costs are then passed through to consumers in the form of increased prices for products and services.
There is a risk that the central banks will cause a recession that is deeper and last longer than expected. If companies suddenly begin cutting staff in large numbers, a spike in unemployment would potentially put the housing market under added strain. In a worst-case scenario, property prices would plunge as owners default, and the banks could get stuck with houses and condos that are worth less that the amount owed.
This outcome is unlikely but not impossible, and investors need to keep the risks in mind.
Should you buy Royal Bank stock?
Royal Bank trades near $133.50 at the time of writing compared to a 2022 high above $149.
Buying the stock on dips has historically proven to be a savvy move for patient investors. However, I wouldn’t back up the truck right now. At 12 times trailing 12-month earnings RY stock isn’t cheap today, and investors could see a better entry point emerge in the coming months.
