Is Royal Bank Stock Worth Buying Despite its Q2 Earnings Miss?

Here are some key factors you may want to consider before buying RY stock after its recently released weak second-quarter results.

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As the stock market turmoil continues in 2023 due mainly to macroeconomic uncertainties, the Canadian banking sector is witnessing pessimism. This is one of the key reasons why after losing more than 5% of its value, the shares of Royal Bank of Canada (TSX:RY), the largest Canadian bank, have fallen by another 4.6% this year so far, driving its market cap down to $168.4 billion. By comparison, the TSX Composite Index currently trades with 2% year-to-date gains.

Before I discuss whether this dip could be seen as an opportunity to buy RY stock at a bargain, let’s take a closer look at some key highlights from its second-quarter results, released earlier this week on May 25.

Royal Bank of Canada stock

In the second quarter of its fiscal year 2023 (ended in April), Royal Bank’s revenue continued to grow positively by 20.5% year over year to $13.5 billion, exceeding analysts’ expectation of $13.1 billion, partly due to the strong performance of its corporate and investment banking segment.

On the negative side, increased staff and technology-related costs and higher provisions for credit losses drove its adjusted quarterly earnings down by 11.7% from a year ago to $2.65 per share. With this, RBC missed Street analysts’ earnings estimate of $2.79 per share. Its earnings miss could be the reason why investors reacted negatively to its results, as RY stock slipped by nearly 2% to $121.48 per share on the day its quarterly earnings report came out.

Dark clouds of the gloomy economic outlook

On the one hand, the demand for consumer discretionary products has gone down in recent quarters. On the other hand, the cost of borrowing has shot up with consistently increasing interest rates. Citing these negative factors, Royal Bank of Canada continues to predict a mild recession.

During its latest quarterly earnings call, its chief executive officer Dave McKay also noted that the bank doesn’t “expect central banks to cut interest rates through 2023,” as the labour market remains strong.

Is RY stock still worth buying now?

Clearly, inflationary pressures and high interest rates could continue to affect consumer demand in the near term and keep the stock market highly volatile. In such a scenario, it’s nearly impossible for anyone to accurately predict RY stock’s movement for the near term. Nonetheless, short-term economic uncertainties and market downturns open opportunities for investors to add some quality stocks to their portfolios for the long term.

Although the ongoing economic uncertainties may continue to badly hit regional banks, large banks with strong financial positions and robust balance sheets, like Royal Bank, should remain largely unaffected by a temporary economic downturn. That’s why I find RY stock worth considering on the dip now, as it has the potential to yield healthy returns in the long run.

Moreover, Royal Bank rewards its investors with attractive dividends, making its stock even more attractive for investors seeking to earn passive income. Interestingly, its dividend per share has increased by 43% in the last five fiscal years. At the current market price, the stock offers an attractive 4.4% annual dividend yield and distributes its dividend payouts every quarter.

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.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.

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