Royal Bank (TSX:RY) and Canadian National Railway (TSX:CNR) are industry leaders and giants on the TSX. Investors with some cash to put to work in a self-directed RRSP or Tax-Free Savings Account (TFSA) are wondering if this is a good time to add these top Canadian stocks to their portfolios.
Royal Bank
Royal Bank is Canada’s largest company with a current market capitalization near $174 billion. The bank generated adjusted net income of $3.8 billion in fiscal Q2 2023. That’s not too shabby for three months of work, even though the profits are off about 13% from fiscal Q2 2022. Adjusted return on equity (ROE) came in at 14.9%. This is down from 18.6% in the same period last year but is still at a level that most global banks would love to achieve.
Profits took a hit due to a higher provision for credit losses (PCL). Royal Bank set aside $600 million for potential loan losses in the quarter compared to a PCL reversal of $342 million in the same quarter last year. It is important to note that while the PCL can reduce reported earnings, it isn’t a guaranteed loss. As the fiscal Q2 2022 report shows, customers that are in trouble don’t always default.
All of the big Canadian banks increased their PCL in the latest quarter as high interest rates and high inflation put more pressure on businesses and households. Investors could see the PCL amount continue to rise over the coming quarters, especially if the Bank of Canada and U.S. Federal Reserve continue to raise interest rates in their battle against persistent inflation.
That being said, Royal Bank has adequate excess capital to ride out some turbulence and recent acquisition activity should help drive future revenue grow. Royal Bank purchased a wealth management business in the United Kingdom for $2.4 billion last year and is in the process of acquiring HSBC Canada for $13.5 billion.
The board just raised the quarterly dividend by about 2% to $1.35 per share. That’s good for a yield of 4.3% at the time of writing. The stock trades near $125 right now compared to just under $140 in February.
CN
CN operates rail lines that cross Canada from the Pacific to the Atlantic and run down through the United States to the Gulf Coast. The company plays an essential role in the smooth operation of the Canadian and American economies, moving everything from cars, coal, crude oil, and fertilizer to forestry products, grain and finished consumer goods.
CN has demonstrated over the past year that it has the power to pass rising costs through to its customers. This is an important fact to consider when evaluating stocks to buy during an era of high inflation. The railway posted record Q1 2023 revenue of $4.3 billion, up 16% from the same period last year.
Adjusted diluted earnings per share (EPS) rose 38% and free cash flow increased 4% to just under $600 million. Management upgraded its guidance for the year as a result of the strong Q1 performance.
The board raised the dividend by 8% in January and announced a share buyback plan that will see CN repurchase up to 32 million shares, or about 4.8% of the common stock float over a 12-month period.
CN stock trades near $156 per share at the time of writing compared to the 12-month high around $175. Investors can get a dividend yield of 2% right now.
Is one a better buy?
Investors who are more focused on passive income might want to make Royal Bank the first pick today for the higher yield. Royal Bank and CN both deserve to be anchor picks in a portfolio targeting total returns.
Near-term volatility should be expected, but buying these stocks on dips has historically proven to be a profitable decision for long-term investors.
