Royal Bank of Canada is celebrated as a conservative, blue-chip stock offering a dependable dividend yield.
But there’s more. It has also returned our investors a massive 1,664.1% gain since we first recommended it in April 1995. That gain dramatically outpaced the 384.1% rise for the S&P/TSX Composite index.
Why buy now? Current uncertainty caused by rising interest rates and still-high inflation has prompted Canada’s big banks to increase their loan-loss provisions.
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Those provisions remain well below their 2020 pandemic peaks. Still, the impact on earnings impacts valuations and that only increases the current buying opportunity.
The stock trades at modest 10.9 times forecast earnings. That’s cheap for such a solid business.
ROYAL BANK OF CANADA (Toronto symbol RY; www.rbc.com) recently agreed to pay $13.5 billion in cash for the Canadian operations of U.K.-based HSBC Holdings plc (New York symbol HSBC). That includes 130 branches, which mainly cater to businesses in industries that trade and bank internationally. HSBC also provides banking and wealth management services to over 770,000 retail clients. In all, it has total assets of $134 billion.
If Royal can win the necessary regulatory approvals, it aims to complete the purchase in late 2023. The bank expects it will cost $1 billion to integrate the new operations, but also expects to realize annual cost savings of $740 million by the end of the second year.
Due to the small size of the Canadian banking market, Royal prefers to expand internationally. For example, in 2015 it acquired Los Angeles-based City National Bank for $5.5 billion U.S. in cash and shares. City National lends to wealthy individuals as well as businesses in the entertainment, technology and health-care industries.
That acquisition is a big reason why overall revenue rose 20.5% for Royal, from $40.67 billion in 2017 to $48.99 billion in 2022 (fiscal years end October 31).
Overall earnings gained 12.5%, from $11.43 billion in 2017 to $12.86 billion in 2019; due to fewer shares outstanding, earnings per share rose at a faster rate of 15.7%, from $7.56 to $8.75.
Royal set aside $4.35 billion to cover potential loan defaults in fiscal 2020 due to the uncertainty over COVID-19; that was up 133.4% from $1.86 billion in 2019. As a result of the spike, earnings in 2020 fell 11.1% to $11.44 billion, while earnings per share declined 10.6% to $7.82.
However, Royal was reversing those provisions as the economy re-opened. As a result, earnings in 2021 jumped 40.3%, to $16.04 billion; per-share earnings rose 41.4% to $11.06. In fiscal 2022, earnings then dropped 1.5%, to $15.81 billion, or $11.06 a share (on fewer shares outstanding). The reduced profit reflected lower results in Capital Markets and Insurance, partially offset by higher earnings in Personal & Commercial Banking, Wealth Management, and Investor & Treasury Services. The current year also reflects lower releases of provisions on performing loans than a year ago.
Meanwhile, Royal’s earnings in its fiscal 2023 first quarter, ended January 31, 2023, fell 22.6%, to $3.17 billion from $4.09 billion a year earlier. However, due to fewer shares outstanding, per-share earnings declined at a slower rate of 19.4%, to $2.29 from $2.84.
The lower earnings are mainly due to the federal government’s new Canada Recovery Dividend (CRD), which is a one-time 15% tax imposed on banks and life insurance companies on profits over $1 billion in 2020 and 2021. The tax is payable in equal installments over five years.
If you factor out that charge, Royal’s earnings per share rose 7.3% in the quarter to $3.05 a share. That topped the consensus estimate of $2.94.
The bank also set aside $532 million to cover future loan losses, up 406.7% from $105 million a year earlier.
Value Stocks: Revenue is up and the earnings dip should be temporary for Royal Bank of Canada
Earnings from Royal’s retail banking division (49% of the total) gained 7.7% due to higher interest rates and improving loan demand. That offset the higher loan-loss provisions and employee costs.
As well, earnings from wealth management (20%) improved 3.3% due to higher net interest income and assets under management. Earnings at Royal’s capital markets business (29%) also rose 9.0% on better trading volumes and a lower tax rate.
Those gains offset a 24.9% decline in earnings at the insurance division due to higher claims.
Overall revenue rose 15.5%, to $15.09 billion from $13.07 billion. That also beat the $13.39 billion consensus forecast.
For all of fiscal 2023, Royal will probably earn $11.76 a share, and the stock trades at an attractive 10.9 times that forecast.
With the February 2023 payment, the bank raised your quarterly dividend by 3.1%, to $1.32 a share from $1.28. The new annual rate of $5.28 yields a solid 4.1%.
Royal has now raised its dividend by an average of 7.7% annually over the last 5 years. Its TSI Dividend Sustainability Rating is Highest.
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