Valued at $188 billion by market cap, Royal Bank of Canada (TSX: RY) is the largest stock on the TSX. In the last 20 years, RBC stock has returned 330%. After adjusting for dividends, total returns are closer to 826.4%, easily dwarfing the returns of the TSX index, which has gained 356% since January 2004.
Despite its outsized gains, the Canadian banking giant also offers shareholders a tasty dividend yield of 4.1%. Let’s see why it makes sense to own RBC stock right now.
The bull case for Royal Bank of Canada stock
Unlike their counterparts south of the border, Canadian banks are conservative lenders. Moreover, the Canadian banking sector is heavily regulated, allowing the big banks, including RBC, to enjoy entrenched positions and enviable market shares.
While RBC and its peers grow at a slower pace compared to U.S. banks, they have stronger balance sheets and enough liquidity to withstand economic downturns with relative ease. For instance, each of the six major Canadian banks maintained their dividends during the financial crash of 2008, which was not the case in the U.S.
A strong balance sheet has allowed RBC to raise dividends by 10.4% annually in the last 29 years, which is exceptional for a cyclical stock.
In the last two years, RBC has been wrestling with macro headwinds such as higher interest rates, inflation, slower consumer spending, and a sluggish macro environment. These factors have led to slowing loan growth and higher provisions for credit losses, or PCLs.
However, analysts expect RBC’s adjusted earnings to grow by 5.2% annually in the next five years. Priced at 12 times forward earnings, RBC stock is quite cheap, given its earnings growth forecast and high dividend yield.
How did RBC perform in fiscal Q4 of 2023?
In the fiscal fourth quarter (Q4) of 2023 (ended in October), RBC reported earnings of $4.1 billion, beating estimates by more than 5%, allowing it to raise dividends by 2% year over year. Despite a challenging macro economy, RBC grew revenue by 4%, reflecting the strength of its diversified business model, as it gained market share in verticals such as investment banking and global markets.
Further, volume growth in the Canadian banking business and higher fee-based revenue from Wealth Management drove top-line growth in Q4.
RBC also added $194 million to its PCLs to shield it from higher delinquency rates and ended the quarter with a CET1 (common equity tier-one) ratio of 14.5%, up 200 basis points year over year. A higher CET1 ratio is favourable, as it provides banks with additional liquidity to tide over economic downturns.
In fiscal 2023, RBC reported earnings of $15 billion, generating a return on equity of 14%. During the earnings call, RBC’s chief executive officer, David MacKay, stated, “Our balance sheet is diversified by both industry and geography underpinning our all-weather franchise. The strong balance sheet, combined with our premium ROE, enables RBC to create value for our clients and shareholders through the cycle.”
RBC has grown its book value per share by 10% annually between 2012 and 2022, enabling it to deliver market-beating gains to shareholders.
