Large-cap stocks are among the safest and most dependable equities on the Toronto Stock Exchange (TSX). Among them, you’ll find a lot of banks, energy companies, utilities, and even a few tech stocks. The TSX Composite Index is fairly concentrated, meaning that a few stocks make up an outsized percentage of the index. Some of these stocks are very widely owned.
In this article, I will explore one TSX stock that is owned by the average Canadian investor and attempt to determine whether it is worth holding at today’s prices.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY) is Canada’s biggest bank. It has $1.47 trillion in total assets and did $19 billion in net income last year. It has a $153 billion market capitalization, which actually seems somewhat small given the scale of the business itself.
Granted, banks have enormous liabilities, and Royal Bank’s $1.47 trillion in assets is not indicative of equity (which is more like $81.3 billion). Nevertheless, RY’s $1.47 trillion worth of assets consists of a lot of mortgages and treasuries that have far higher yields than the company’s chequing accounts and most of its savings accounts. So, there is a lot of profit potential here.
High yield
One thing that Royal Bank stock has going for it now is a high dividend yield. RY pays $4.03 in dividends per share per year, which provides a 3.71% yield at today’s prices. That’s on the lower end for the Big Six banks but higher than the TSX Composite Index’s yield. Royal Bank has increased its dividend by 6.36% per year over the last five years. With today’s high interest rates and rising investment banking fees, it’s possible that the company will keep this track record going into the future.
Relatively cheap valuation
Royal Bank stock is pretty cheap by the standards of the overall markets. It trades at 13 times earnings, 3.9 times sales, and 1.9 times book value. By contrast, the S&P 500 trades at 24 times earnings. So, RY is cheaper than the most followed North American stock market index. It is also cheaper than the TSX Index, which trades at 21 times earnings. On the other hand, Royal Bank is a little more expensive than the average Canadian bank, which trades at somewhere around 11-12 times earnings. So, it may underperform its sector going forward.
High profits
Another thing that Royal Bank has going for it is high profits — specifically high profit margins. In the most recent 12-month period, the bank had a 28% net income margin and a 14% return on equity (a measure of how much profit the company generates from what it owns). Both of these metrics were above average for Canadian companies in the period. So, we can say that Royal Bank was more profitable than its peer group in the past year.
One negative
Despite the positives I highlighted in this article, there is one thing I don’t like about Royal Bank: its recent HSBC Canada deal. RY paid $13.5 billion for that bank, which earned $717 million in 2021. The deal decreased the most recent quarter’s net income by $51 million. So far, Royal Bank is losing money on HSBC Canada. That’s not a positive, but Royal Bank is still doing well overall.
