Before You Buy Apple, Here’s a Canadian Bank I’d Buy First

Apple Inc (NASDAQ:AAPL) is a good stock, but I’d buy Royal Bank of Canada (TSX:RY) first.

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Apple (NASDAQ:AAPL) is one of the most popular stocks in the world. With a US$3 trillion market cap, it’s also the world’s biggest company. Each and every year, Apple cranks out $80 billion in profit. It’s a giant in the world of consumer electronics.

That doesn’t mean that it deserves an infinite price, though. Apple stock currently trades at 30 times earnings, 7.5 times sales, and 46 times book value. It’s an expensive stock. Despite the steep price tag, the company isn’t growing much this year: in the trailing 12-month period, revenue is down 0.93%!

This might not be the best time to rush into Apple stock. I personally hold the stock, but my average cost is much lower than today’s price. I would not be buying it right now. What I would be buying is a Canadian bank. Canadian banks are cheap right now, yet their revenue is on the rise. In this article, I’ll explore one Canadian bank stock that I’d buy before adding to my Apple position.

Royal Bank of Canada

Royal Bank of Canada (TSX:RY) is a Canadian bank, the biggest in the country by market cap. RY is known for its diversified business, which includes retail banking, investment banking and insurance.

Royal Bank has performed reasonably well as a company over the years. It was founded all the way back in 1850. It hasn’t missed a dividend payment in over 100 years.

How has Royal Bank been performing more recently? Pretty well. In its most recent quarter, the company delivered the following:

  • $12.92 billion in revenue, up 11.8%
  • $3.65 billion in net income, down 14.5%
  • $4.8 billion in operating income, down 15%
  • $2.58 in diluted earnings per share, down 12.84%

This isn’t a bad showing. It might look bad, what with all the metrics except revenue going down, but you need to know some things about how banks manage risk. Banks have an “allowance for credit losses,” which is money needed to cover non-performing loans. Whenever banks add money to this account, it causes net income to go down. RY did add money to the allowance last quarter, hence the declining profit. However, this was not a real cash flow loss. If the risks in the economy start to abate, then RY will be able to report rising profits.

Solid profitability

One factor that RY stock has in its favour is high profit margins. In the trailing 12-month period, the company had a 27.8% profit margin and a 14% return on equity. Both of these metrics suggest healthy profitability.

Moderate growth

Another thing that Royal Bank stock has going for it is growth. Over the last five years, the bank has grown its revenue by 5% CAGR and its earnings by 5.3% CAGR. “CAGR” means compound annualized growth rate. These are solid growth numbers for a bank. Despite the growth, RY trades at just 11.8 times earnings and 1.7 times book value. The S&P 500 has a 20 P/E ratio, so RY is relatively inexpensive compared to the entire universe of stocks investors have to choose from. On the whole, it’s a stock worth investing in.

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 has positions in Apple. The Motley Fool recommends Apple. The Motley Fool has a disclosure policy.

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