The big Canadian bank stocks have faced considerable headwinds over the past two years. But the headwinds haven’t proven insurmountable, with various bank stocks like Royal Bank of Canada (TSX:RY) finding a way to climb higher despite downbeat macro expectations. Undoubtedly, Canada’s economy doesn’t seem to be headed for a harsh recession.
At the same time, it doesn’t seem to be a loud roaring economy, either, as the TSX Index just begins to pick up traction in what could be the first innings of the new bull market. With the TSX Index just north of 22% from its lows, it does seem like the bull is back in the driver’s seat.
Don’t expect a June rate cut — not after the jobs data
That said, there seems to be an aura of uncertainty that could prevent investors from piling back into the bull trade. Indeed, the Bank of Canada (BoC) may cut interest rates sooner than the U.S. Federal Reserve, but that doesn’t mean a June rate cut is on the table.
Arguably, the recent jobs data has pushed out such a rate cut, I believe, to the late third or even fourth quarter of 2024. And if inflation proves just a bit too sticky, I would not be surprised if we escape 2024 without a single rate cut from the Bank of Canada, especially if the economy isn’t yet ready to pick up some serious traction.
With a bit of inflation at risk of sticking around for a while longer, pressure from past price increases (remember, just because inflation normalizes doesn’t mean the higher prices suddenly go away), and potentially flat growth for the economy, I’d argue the BoC has plenty of reasons to postpone the first round of rate cuts. Indeed, there may be less to lose if they choose to cut next year rather than running the risk of pulling back on rates too soon and giving inflation a chance to worsen.
Royal Bank stock: It’s been hot of late!
Now, back to Royal Bank of Canada: it’s proven an incredibly resilient financial over the past year, with shares now up close to 9% year to date and around 32% from its October 2023 lows.
The stock trades at 13.3 times trailing price to earnings (P/E), with a dividend yield that currently stands just shy of the 4% mark at 3.91%. Indeed, shares of RY remain attractively valued, but they’re not the same steal that they were two quarters ago. In any case, as RY stock leads the Canadian banking group higher, I’d not be afraid to be a net buyer if the dividend entices you.
I’m very enthused about Royal Bank’s acquisition of HSBC’s Canadian division, and I think it could give the $202 billion banking giant a slight edge over its rivals in the so-called Big Six. While I don’t think it’s too late to be a net buyer of RY stock, I think there’s more value to be had in one of its more pressured rivals. Indeed, some banks are close to multi-year lows, with dividend yields that are well above the 5% mark.
Bottom line: It’s not too late to buy RY stock
So, if you seek deeper value and fatter yields, it may be best to look elsewhere. However, if you seek rock-solid stability for the long run and aren’t afraid to pay a fair (rather than dirt-cheap) multiple, go ahead and pick up RY. It’s not too late to hop aboard the name. But I’d much rather wait for a pullback to around $130 before getting in.
