Royal Bank of Canada (TSX:RY) stock has been trading on a weak note for over two years. After underperforming the broader market last year, RY stock hasn’t seen any notable change so far in 2024 and currently trades at $133.30 per share with a market cap of $187 billion. Despite the recent weakness, however, the largest Canadian bank stock has managed to yield strong 82% positive returns in the last decade, beating the TSX Composite’s 49.3% return during the same period.
But can RY stock maintain this long-term upward trend in the next five years, or is it losing its positive momentum? Let’s review some factors that affected Royal Bank’s recent share price movement in the last two years before I highlight factors that could influence its future performance.
What’s affecting Royal Bank’s share price movement
A selloff in Royal Bank and most other Canadian bank stocks started in 2022 after the Bank of Canada (BoC) vowed to fight inflationary pressures by rapidly tightening monetary policy. As rapidly rising interest rates made it difficult for consumers and businesses to borrow money, the demand for loans and many other financial products declined, affecting bank stocks. Also, a tough economic environment led to an increase in Royal Bank’s provisions for credit losses, which also took a toll on investors’ sentiments.
While RY stock largely traded on a weak note in the first three quarters of the calendar year 2023, a steep recovery in its share prices came in the fourth quarter after BoC hinted that the current round of interest rate hikes is nearly over and the central bank might consider slashing interest rates in 2024. This is one of the key reasons Royal Bank stock ended 2023 with 5.3% gains.
Investors were hoping to see multiple rate cuts in 2024. However, persistent inflationary pressures are continuing to delay BoC’s decision to ease monetary policy. That’s why, after rising 3.7% in the March 2024 quarter, RY stock has lost all these gains to trade with a minor 0.5% year-to-date decline.
Where will RY stock be in five years?
It’s true that the ongoing macroeconomic challenges and a high interest rate environment have affected Royal Bank of Canada’s financial growth trends in the last couple of years. Nonetheless, we shouldn’t forget that these temporary challenges couldn’t change its long-term financial growth trajectory.
In fact, the bank’s total revenue and adjusted earnings in its last five fiscal years have gone up by 32%. This positive long-term growth trend in its financials has also helped Royal Bank reward its investors with higher dividends, which have increased by 42% for the last five fiscal years. As a result, it now offers a decent annualized dividend yield of 4.1%.
Moreover, Royal Bank’s solid balance sheet and well-diversified business model give it the ability to navigate the ongoing macroeconomic challenges and take advantage of future opportunities. For example, in the last few years, the bank has raised its investments in digital transformation, which could pay off well in the long run by improving its operational efficiency and enhancing its customer experience.
Despite facing pandemic-driven operational and other economic challenges in the last five years, RY stock has yielded positive returns of more than 25%, even if we exclude the income from its reliable dividends. Given the expectations of rate cuts and better economic growth in the coming years, I wouldn’t be surprised if Royal Bank stock yields significantly stronger returns in the next five years.
