Royal Bank (TSX:RY) is up 20% since late October last year. Investors who missed the bounce are wondering if RY stock is still undervalued and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Royal Bank share price
Royal Bank trades near $130 per share compared to around $108 at the 12-month low. The stock is still shy of the $147 it reached two years ago after the post-crash rally.
Bank stocks have been under pressure for the past two years amid concerns that interest rate hikes by the Bank of Canada and the U.S. Federal Reserve will eventually cause a deep recession. The central banks have aggressively raised rates in an effort to get inflation under control. The move appears to be working, with December 2023 inflation in both countries coming in at 3.4% compared to more than 8% at the peak in June 2022. The target rate, however, is 2%.
Economists widely expect the economy to see a soft landing as higher rates force consumers to reduce discretionary spending. This should loosen up the labour market and ease the upward pressure on wage growth. It is great for everyone to get a big raise, but companies then have to increase prices to maintain margins. That makes stuff more expensive and pushes people to ask for even higher salaries. In a tight jobs market, they can often get the raise. It is this upward cost spiral that the central banks want to halt.
The risk is that rates will have to stay at elevated levels for a longer period than anticipated. Each month that rates remain high, more homeowners and businesses get hit with a jump in borrowing costs. If the economy slows down and unemployment surges, a wave of loan defaults and a deep recession could follow.
The central banks have to walk a fine line. They need to get inflation under control while trying to avoid triggering an economic meltdown. Economists say rate hikes typically take 12-18 months to work their way through the system, so the full impact probably hasn’t arrived.
Royal Bank increased provisions for credit losses (PCL) in fiscal 2023 by roughly $2 billion to $2.5 billion as more borrowers found themselves in difficult situations. This sounds like a large amount, and the number is definitely moving in the wrong direction, but Royal Bank finished fiscal 2023 with total loans of approximately $850 billion, so the loan book remains in good shape.
The common equity tier-one ratio was 14.5% at the end of fiscal 2023. This is well above the 11.5% required by regulators. A good chunk of the excess capital will be used to complete the $13.5 billion acquisition of HSBC Canada, but Royal Bank should still have adequate capital reserves to ride out any ongoing market turbulence.
Earnings
Royal Bank is a very profitable company. Adjusted net income came in at $16.1 billion in fiscal 2023, up slightly from the previous year. Adjusted return on equity remained strong at 15.4%.
Dividends
Royal Bank increased the dividend twice in 2023, so management can’t be overly concerned about the profit outlook. Investors who buy RY stock at the current price can get a 4.25% dividend yield.
Is Royal Bank a good RRSP stock?
Royal Bank continues to deliver strong profits in challenging times and pays an attractive dividend that should grow in the coming years. The stock isn’t as cheap as it was a few months ago, but buy-and-hold investors should still consider adding Royal Bank to their RRSP and look to boost the position on the next pullback.
If you are searching for a high-quality dividend stock to be an anchor holding in a self-directed RRSP, this stock deserves to be on your radar.
