Deciding which stocks to buy and hold for your portfolio is one of the most important decisions you’ll make when investing. But as difficult as it is to decide if you should buy a stock like Royal Bank of Canada (TSX:RY) in good times, it’s even harder to decide which stocks to buy when there’s a potential recession on the horizon.
Normally, a rising interest rate environment is positive for banks. However, over the last year, central bankers quickly raised interest rates and the economy faces so many headwinds. The impacts of increasing interest rates are being offset by the increasing uncertainty and potential for a recession.
During recessions, more individuals and businesses are likely to become delinquent on their debt. The payment misses could cause significant charge-offs for banks resulting in big losses.
So if you’re looking at buying Royal Bank of Canada stock in this environment, here’s what you’ll want to consider.
Should you buy Royal Bank of Canada stock today?
In normal times, there are tonnes of reasons to buy Royal Bank stock. It’s the largest bank in Canada and has the number one or two market share in all key product categories across Canadian banking.
Furthermore, it has a total of 17 million clients and operations in 29 countries. The number one investment bank in Canada is the 9th largest global investment bank based on fees earned and the number one Canadian investment bank in the U.S.
There’s a lot to like about Royal Bank of Canada stock. Notably, it has an impressive long-term track record and future potential for growth. And although there is increased risk in this environment, you can have confidence buying the stock today, knowing that Canadian banks are some of the safest in the world.
Furthermore, RBC is focused heavily on managing its risks and limiting the negative effects a recession could have on its business.
RBC mentioned in its last conference call that it’s looking to manage the risk from changing interest rates given the uncertain environment. Right now, it looks as though interest rates may need to continue increasing to cool the economy. But once the economy is in recession, many are expecting that interest rate cuts could start.
Royal Bank of Canada also needs to manage its loan books to keep its charge-offs as low as possible. Therefore, to keep its solid financial position while there’s increased economic uncertainty, RBC said it will defer further share repurchases until the anticipated close of the HSBC Canada acquisition. The deal is expected to be completed in late 2023.
RBC is only worth buying for the long haul
Because of the increased risk in both the economy and stock market today, it’s essential that if you’re planning to buy RBC stock now, you plan to do so for the long haul.
Investing for years is one of the best ways to mitigate short-term risk, especially if you’re buying such a high-quality and consistent stock like RBC.
For example, its five-year average return on equity is 16.7%, and dividend payout ratio was just 47% at the end of 2022. This payout is right in line with its target range of 40% to 50%. Furthermore, that dividend, which offers investors a yield of 3.8% today, has grown at a compounded annual growth rate (CAGR) of 10% over the last decade.
RBC can increase the dividend so significantly and consistently because it’s constantly growing its profitability. The bank aims to grow its diluted earnings per share by at least 7% every year. Over the last five years, it has averaged 8% compounded annual growth. In addition, RBC’s book value per share was up 13% in 2022 and has grown at a CAGR of 10% over the last three years.
So not only is Royal Bank of Canada stock reliable and consistent, but it provides attractive dividend growth alongside the capital gains potential it offers. In fact, over the last decade, investors have earned a total return of more than 220% owning RBC, a CAGR of 12.4%.
So although there is certainly increased risk in this environment, if you’re planning to buy RBC stock for the long haul, it’s a stalwart investment to consider for your portfolio.
