Royal Bank (TSX:RY) is Canada’s largest bank by market capitalization with a current value near $190 billion.
The share price is up 25% on the TSX since late October last year. Investors who missed the rebound are wondering if RY stock is still cheap and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio targeting dividends and total returns.
Royal Bank stock
The shares trade near $135 at the time of writing compared to the 12-month low near $108. Royal Bank was as high as $147 at one point in early 2022 before trending lower for much of the following two years.
Interest rate hikes are largely responsible for the decline that occurred in 2022 and through most of last year. The Bank of Canada and the U.S. Federal Reserve raised interest rates aggressively to try to get inflation under control. Higher interest rates drive up borrowing costs for households and cut into cash flow available for spending on goods and services. The central banks want to cool off the economy and bring the labour market back into balance as a means of reducing upward pressure on prices and wages.
The strategy appears to be working. Inflation topped 8% in Canada in June 2022. The February 2024 inflation report came in at 2.8%. This is getting close to the 2% target.
Bank stocks rallied over the past several months in anticipation of rate cuts in 2024. Royal Bank and its peers raised provisions for credit losses (PCL) in recent quarters as clients with too much debt started to get into trouble due to the surge in rates. A downward shift in interest rates will take some pressure off households and businesses that are struggling to make their loan payments.
Market concerns about a deep recession have also eased. Economists broadly expect Canada and the U.S. to go through a short and mild recession as a result of the jump in interest rates. This soft landing is positive for the banks as it would mean businesses will continue to borrow to grow and unemployment shouldn’t spike.
If the central banks begin to lower rates in the second half of 2024, Royal Bank’s share price could continue to drift higher.
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Another positive for Royal Bank stock should be the recent completion of the takeover of HSBC Canada. The deal will provide a boost to revenue this year and add a portfolio of new branches with affluent clients.
Risks?
Soaring oil prices and continued wage growth could stall the downward inflation trend and force the Bank of Canada and the U.S. Federal Reserve to keep rates at current levels through the end of 2024. If the market starts to sense that will be the case, bank stocks could give back a good chunk of their recent gains. The recent uptick in bond yields suggests that market might already be adjusting its outlook.
Should you buy Royal Bank stock now?
Royal Bank trades near 12.6 times trailing 12-month earnings. This isn’t cheap. However, Royal Bank is a very profitable company and patient investors with a buy-and-hold strategy should do well adding the stock to their portfolios. The current dividend yield is about 4%, so you get paid well to ride out some turbulence.
If you have some cash to put to work, I would probably take a half position at this point and look to add to the holding on a pullback.
