Royal Bank of Canada Stock: Buy, Sell, or Hold?

Royal Bank’s stock price is on a roll. Are more gains on the way?

| More on:
man touches brain to show a good idea

Source: Getty Images

Royal Bank (TSX:RY) is up more than 20% since late October. Investors who missed the strong year-end rally in the TSX bank sector are wondering if RY stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.

Bank stocks outlook

Bank stocks peaked in early 2022 after the strong recovery from the 2020 crash. The decline that followed carried through right up to the end of October 2023. Investors who track what is going on in bond markets can see that the bank stocks slid as bond yields rose, driven by aggressive rate hikes by the Bank of Canada and the United States Federal Reserve, or more precisely, the market’s expectation for additional rate increases.

Up until the end of the third quarter (Q3) of 2023, investors were pricing in expectations for interest rates to continue to rise, as the central banks battle to get sticky inflation back down to the 2% target. Banks have been forced to increase their provisions for credit losses over the past year. Customers with too much debt are running into trouble when they have to renew fixed-rate mortgages at much higher rates. Borrowers with variable-rate loans take it on the chin immediately after each increase in interest rates.

At this point, the loan-loss provisions remain very low relative to the overall loan books, but markets were concerned that the central banks would have to force the economy into a steep downturn to get inflation under control. A plunge in spending could trigger losses in businesses and lead to a surge in unemployment. This would potentially create a wave of loan defaults and bankruptcies.

Surprisingly, sentiment has shifted dramatically in the past two months. Markets now expect the central banks to start cutting interest rates before the end of 2024 in order to orchestrate a soft landing for the economy. The most optimistic analysts predict a return of inflation back to 2% without the economy going through a recession. Economists broadly expect a short and mild recession to occur, followed by an economic rebound. In this scenario, bank stocks looked heavily oversold. That’s why the sector rallied so much in recent weeks.

Royal Bank stock

Royal Bank trades near $134 at the time of writing. That’s up from $108 at the 2023 low and not far off the $147 peak in early 2022.

Royal Bank raised the dividend twice in 2022, despite the headwinds, supported by a solid overall performance. The bank generated fiscal 2023 adjusted net income of $16.1 billion, up slightly from fiscal 2022. Adjusted return on equity slipped a bit but remained robust at 15.4%.

At the time of writing, RY stock provides a dividend yield of 4.1%.

Should you buy RY stock now or wait?

Royal Bank offers an attractive dividend that should continue to grow. If you already own the stock, it makes sense to continue to hold the position. Investors seeking a new anchor stock for a buy-and-hold portfolio targeting total returns should be comfortable buying RY stock today. However, I would keep the position small and look to add more on a pullback.

Inflation could turn out to be stickier than expected, and the central banks might need to keep interest rates at current levels until 2025. Bond yields are already starting to move higher again, which suggests the market is feeling less certain that rate cuts are coming soon. Another sentiment swing could push bank stocks lower and deliver a better buying point in the coming months.

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 Andrew Walker has no position in any stock mentioned.

More on Bank Stocks

Bank Stocks

3 Reasons to Buy TD Bank Stock Like There’s No Tomorrow

Looking for a great bank stock to add to your portfolio? Here are three reasons why TD (TSX:TD) may be…

Read more »

Stocks for Beginners

Value Investors: Are You Buying and Holding Forever? Think Again

Value stocks are great, but if you don't have a goal in mind that stock can quickly turn from value…

Read more »

question marks written reminders tickets
Bank Stocks

Is Bank of America Stock a Good Buy Right Now?

Down 40% from all-time highs, Bank of America stock is very cheap and may outpace the broader markets this year.

Read more »

Bad apple with good apples
Bank Stocks

A U.S. Bank Stock Just Tanked: Is Canada Next?

A U.S. bank stock just plunged from downgrades, so how are Canadian bank stocks faring, and could they be next…

Read more »

Man holding magnifying glass over a document
Bank Stocks

Bank Stocks Are a Deep Value Today: 2 Top Choices to Watch

TD Bank (TSX:TD) and another stock are intriguing bank stocks with deep value propositions for long-term investors.

Read more »

protect, safe, trust
Dividend Stocks

Want Super-Safe Dividend Income in 2024? Invest in the Following 2 Ultra-High-Yield Stocks

High-return investments are usually high risk but two generous dividend payers are exceptions if you want super-safe dividend income in…

Read more »

Man data analyze
Bank Stocks

Is it Now Too Late to Buy Bank of Montreal Stock?

Bank of Montreal is up 20% from the 2023 low. Are more gains on the way?

Read more »

woman analyze data
Bank Stocks

RRSP Investors: Is Royal Bank of Canada Stock a Buy Now?

Royal Bank is up 20% from the 2023 low. Are more gains on the way?

Read more »