Is RBC a Buy, Sell, or Hold?

Here’s why I think RBC stock is a great buy for long-term investors at current levels despite its dismal performance of late.

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Even as the Canadian stock market has started 2024 on a solid note, bank stocks continue to remain under pressure. Notably, the TSX Composite touched its all-time high last week and has risen over 5% in the last year. But the share value of the largest Canadian bank, Royal Bank of Canada (TSX:RY), has remained largely unchanged during this period. With this, RBC currently trades at $133.11 per share with a market cap of $188.1 billion and offers an annualized dividend yield of 4.1%.

In this article, we will take a closer look at RBC’s recent financial performance, growth prospects, and dividend growth trends to find out whether it’s a buy, sell, or hold. But first, let’s take a closer look at some key factors that have been affecting RBC’s stock price movement lately.

What’s affecting RBC’s stock price movement

As COVID-19 started taking a big toll on the economy in 2020, the Bank of Canada made steep declines in interest rates to support economic growth. After keeping interest rates close to zero for nearly two years, the central bank started rapidly raising interest rates at the beginning of 2022 to fight inflationary pressures. As high interest rates have made it increasingly difficult for consumers and businesses to borrow money, the financial sector, especially bank stocks, witnessed a selloff that year. This is one of the key reasons why RBC’s share prices tumbled by 5.2% in 2022.

In late 2023, central banks in the United States and Canada indicated that interest rates had nearly peaked, and expectations of interest-rate cuts in the near term regained bank investors’ confidence, leading to a rally in most Canadian bank stocks. That’s why, despite losing about 7% of its value in the first three quarters of 2023, RBC stock managed to end the year in the green territory — thanks to a spectacular 13% jump in its share prices in the final quarter of the calendar year 2023.

While rate-cut hopes helped RBC extend its recent rally by another 2% in the March 2024 quarter, it has lost around 2.6% of its value in the ongoing quarter so far as recently released stronger-than-expected consumer inflation data is keeping investors skeptical about the timing of upcoming rate cuts.

Is RBC stock a buy, sell, or hold today?

RBC has a strong track record of raising dividends, as it has increased dividends per share by 42% in the last five fiscal years. In the 12 months ended in January 2024, RBC’s total revenue has gone up by 6.9% YoY (year over year) to $54.5 billion, largely with the continued strong performance of its insurance and fixed income segments. Despite higher revenues, however, the Canadian lender’s adjusted earnings have slipped 2.7% YoY in the last year to $11.12 per share due mainly to RBC’s increased provisions for credit losses amid an uncertain macroeconomic environment.

But it’s noteworthy that most of the challenges RBC is facing right now are temporary and shouldn’t have a major impact on its long-term growth outlook. It’s true that given the uncertainty around interest rates and inflation, RBC stock may face some volatility in the near term. However, its strong balance sheet, strong international presence, and solid dividend track record still make its stock worth buying on the dip if you can hold it for at least the next 10 years.

And if you already own RBC stock, you may want to hold on to it for the long term as it currently looks undervalued and has the potential to recover sharply as soon as the macroeconomic risks start gradually subsiding.

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 Jitendra Parashar has no position in any of the stocks mentioned.

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