Is RBC a Buy, Sell, or Hold?

RBC is a blue-chip dividend stock that investors can consider buying and holding. Is now the right time to buy?

| More on:

Royal Bank of Canada (TSX:RY) is a solid long-term investment. In the last five, 10, and 20 years, it delivered annualized total returns of approximately 10.3%, 11.1%, and 12.3%, respectively. To be more concrete, it turned an initial investment of $10,000 into roughly $16,290, $28,680, and $102,230, respectively.

A good portion of these returns came from its dividend, which RBC has increased over time. Currently, the stock offers a dividend yield of 3.9%. Since the Canadian banking leader pays a safe dividend, the dividend yield is a good gauge of the stock’s valuation.

Here’s a 10-year history of the stock’s dividend yield range and quarterly dividend. The current dividend yield indicates that the stock is not exactly a bargain. Based on the decade’s yield history, RBC stock is likely a good buy whenever it offers a dividend yield of close to 5%.

RY Dividend Yield Chart

RY Dividend Yield data by YCharts

Let’s take an actual look at its valuation. At about $141 per share at writing, which is a price to book of about 1.8 times. In recent history, it dipped to below 1.6 times book.

RY Price to Book Value Chart

RY Price to Book Value data by YCharts

At this quotation, it trades at a blended price-to-earnings ratio of approximately 12.5 times, which aligns with its long-term normal valuation. Both valuation metrics suggest a stock that’s not cheap. Analysts agree that the stock is fairly valued as the TMX Group website has a consensus 12-month price target of $143.40 on the stock.

This means there’s no margin of safety in the stock. It doesn’t mean that owners of RBC stock should sell immediately because there’s value in earning a perpetual income. For example, investors who bought RBC shares about 15 years ago are sitting on a yield on cost of about 11.8%. Imagine earning a +11.8% return on your investment perpetually (no matter what the economy or financial markets are doing).

Besides, its long-term returns from current levels aren’t bad. Assuming a fairly valued stock and the bank is able to grow its earnings per share by about 6% per year going forward, long-term investors could still get long-term returns of more or less 10% when combining price appreciation from earnings growth and its dividend.

In most years, the Canadian bank stock maintains a payout ratio of about 50%, which protects its dividend and allows for dividend growth over time, along with earnings growth. Investors need to beware of economic downturns, which would be a drag on RBC’s earnings. That said, even during recessions, RBC’s earnings have been resilient. Today, the bank operates a diversified business, consisting of about 39% revenue generation from personal and commercial banking, 31% from wealth management, 20% capital markets, and 10% insurance, based on fiscal 2023 revenue.

In today’s higher interest rate environment, Canadians are experiencing higher interest rates, which could lead to higher levels of bad loans, especially if a recession occurs. This is why it’s also unlikely RBC shares will head much higher over the next 12 months.

All in all, RBC stock appears to be a “hold” at current levels because shares are fully valued, but it pays out a safe and growing dividend, offering a decent dividend yield of 3.9%. On dips of 10% or more (or a price target of below $127) within the next year is a good starting point to consider accumulating shares.

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.

Fool contributor Kay Ng has positions in Royal Bank Of Canada. The Motley Fool recommends TMX Group. The Motley Fool has a disclosure policy.

More on Bank Stocks

open vault at bank
Bank Stocks

What to Know About Canadian Bank Stocks for 2025

With interest rates expected to decline further, along with economic uncertainties and U.S.-Canada trade tensions, Canadian bank stocks could see…

Read more »

coins jump into piggy bank
Bank Stocks

Bank of Montreal: Buy, Sell, or Hold in 2025?

Bank of Montreal (TSX:BMO) has a major US presence. Is it a buy?

Read more »

data analyze research
Bank Stocks

Meet the Canadian Stock That Continues to Crush the Market

Here are the top reasons that could support CI Financial stock’s strong upward momentum in the coming years.

Read more »

A worker gives a business presentation.
Bank Stocks

Top Canadian Financial Stocks to Buy Now

Here are two of the best Canadian financial stocks to buy now and hold for the long term.

Read more »

sale discount best price
Bank Stocks

2 Canadian Bank Stocks to Buy at a Discount

Buying these top Canadian bank stocks today could help you lock in attractive dividend yields while building a portfolio geared…

Read more »

ways to boost income
Bank Stocks

Why Smart Investors Own Canadian Financial Stocks

Investing in Canadian financial stocks could not only provide stability during uncertain times but also offer reliable income.

Read more »

a sign flashes global stock data
Bank Stocks

2 Canadian Bank Stocks to Shield Against Market Downturns

These two top Canadian bank stocks could help protect your portfolio from market downturns with their consistent focus on digital…

Read more »

hand stacks coins
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

If you want returns and income, then consider these top dividend stocks for long-term passive income.

Read more »