Royal Bank of Canada (RY)
From Cabot Wealth Advisory 12/7/15 Sign up for Cabot Wealth Advisory—it’s free!
From time to time, two Cabot advisories will recommend the same stock, purely by coincidence. So it is with Royal Bank of Canada (RY). One analyst is focused mainly on the large and growing dividend, while the other is focused on value. But both recognize that there’s good potential for long-term growth. Putting them together makes a very strong case for the investment.
Here’s what Chloe Lutts Jensen wrote about the stock in Cabot Dividend Investor on November 25.
“Royal Bank of Canada (RY) is one of Canada’s “Big Five” banks. Energy companies make up a big part of the Canadian economy, so the past year of declining oil prices has weighed heavily on all five bank stocks, as investors fret about their impact on Canada’s economy as well as its real estate market, employment situation and appetite for loans.
“The biggest loser has been Bank of Nova Scotia (BNS), which has been aggressively expanding into emerging markets, another weak spot this year. And the most resilient of the five has been Toronto Dominion (TD), the largest of the group, with the highest valuation. In the middle of the pack, high-quality Royal Bank of Canada offers good value, a generous yield, an emphasis on dividends, solid net income growth and the best operating margins of the group.
“Royal Bank of Canada has paid dividends for 20 years. Management has increased the dividend nine times in the past five years, averaging an annual dividend growth rate of nearly 10%. The current payout ratio of 46% is in line with the bank’s historical average and typical payout ratios in the financial industry.
“RY’s dividends are declared in Canadian dollars, so U.S. investors will see some variation in dividends because of exchange rate changes. This inconsistency affects RY’s Dividend Safety Rating, but the company’s overall commitment to rewarding investors still earns RY a solid 7.6 from IRIS. And RY’s stable earnings expectations and track record of dividend boosts earn the stock a Dividend Growth Rating of 7.6 as well.
(Note: IRIS stands for Individualized Retirement Investment System, Chloe’s proprietary rating system; 10 is the highest rating.)
“In recent years, Royal Bank of Canada has pursued growth primarily by expanding its offerings beyond retail banking. The bank now has operations in wealth management, insurance, capital markets and treasury services for institutional investors, as well as personal and commercial banking. Today, personal and commercial banking accounts for 52% of earnings, followed by capital markets at 23% and wealth management at 11%.
“In January, Royal Bank bought U.S.-based City National Corp. (CYN), a private and commercial bank, to expand its wealth management and capital markets presence south of the border. Approximately 19% of revenues now come from the U.S., 18% from other international markets and 63% from Canada.
“Over the past 12 months, Royal Bank of Canada has delivered the second-best return on equity and best operating margins among the Big Five banks. Since 2009, net income has grown by 18% per year on average.
“Going forward, analysts expect EPS growth to reach 7% this year (in U.S. dollars) and average over 8% over the next five years. RY will report fourth-quarter and full-year 2015 results on December 2 before the market opens.
“You can buy RY on either the Toronto or New York Stock Exchange. Both securities trade under the symbol RY. If you’re a U.S.-based investor, buying the Canadian listing will give you exposure to the Canadian dollar, and vice-versa for Canadian investors (although the U.S. listing’s performance is still affected by Canadian dollar weakness). To keep things simple, we’ll be adding the NYSE listing to our portfolio.
“After declining 18% over the past 12 months, NYSE-listed RY now trades at a P/E of 11.5 and a forward P/E of only 10.9. The stock’s current yield of 4.2% is also about half a percent above its five-year average yield of 3.7%, another indication that the stock is undervalued.
“There is some risk that the downtrend in Canadian banks isn’t quite over. However, RY shares have been quite stable over the past month, despite a renewed slide in oil prices to their lowest level since August.
“For long-term income investors, RY presents a good opportunity to buy a high-quality dividend-prioritizing stock at a good value. We’ll be adding the NYSE listing of RY to the Safe Income tier of our portfolio at the average price on the first trading day of December.”
Note: Cabot Dividend Investor recommends three different portfolios, yielding 7.2%, 3.7% and 2.6%, or you can mix and match to build your own custom portfolio using the Individual Retirement Investing System (IRIS). Click here for more details.
Meanwhile, over at Cabot Benjamin Graham Value Investor, ace value analyst Roy Ward has been holding on to Royal Bank of Canada for more than two years! In that time, his readers have not only raked in dividends exceeding 4% per year, they’ve also enjoyed capital appreciation of more than 18%.
When the stock eventually becomes overvalued (and thus risk is high), Roy will tell his readers to sell and move on to a new, low-risk investment, but for now, holding strong remains his advice. Here’s what Roy wrote in his latest update on December 4.
“Royal Bank of Canada (Toronto Stock Exchange: RY.TO: CAD 76.36; NY Stock Exchange: RY: USD 57.20) reported excellent results for the quarter ended October 31. Loans outstanding advanced 8% and EPS surged 11% after increasing 8% and 4% in the prior quarter. Deposits jumped 14% from a year ago. The bank's board of directors increased the quarterly dividend to $0.79 from $0.77 (Canadian dollars). The dividend yield is now 4.1%.”
Note: Roy provided a much more thorough picture of the stock when he initially recommended it. By his system, the stock is too high to buy now but holding is simple. And profitable! Since inception on 12/31/95, the Cabot Value Model has provided an impressive return of 1,089.1% compared to a return of 527.3% for Warren Buffett’s Berkshire Hathaway. During the same 19-year period, the Dow has gained just 246.3%. For more information, click here.
J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 2/28/13 Sign up for free Cabot Wealth Advisory e-newsletter
In my opinion, many exceptional buying opportunities now exist and investors should buy undervalued Canadian stocks. I screened my Benjamin Graham Database to find Canadian companies with rapidly growing earnings and strong balance sheets.
In my opinion, this company offers outstanding appreciation potential during the next one to two years.
Royal Bank of Canada (RY), founded in 1864 in Toronto and also know as RBC, is the fifth largest financial institution in North America and the largest bank in Canada. RBC offers all types of banking and investment services to individuals and businesses through its 1,700 branch offices in Canada and 400 branches in 30 foreign countries.
RBC recently sold its 420 U.S. branches and its U.S. banking network to PNC for $3.5 billion. The sale will enable RBC to expand its Canadian operations and to make strategic acquisitions at home and abroad. Indeed, RBC purchased the remaining 50% ownership in RBC Dexia Investor Services for $1 billion. Royal Bank also bought part of the wealth management division of Royal Bank of Scotland. Finally, RBC will acquire the Canadian auto finance and deposit business of Ally Financial for about $3.5 billion.
Revenues increased 12% and EPS advanced 15%, beating my forecast for the quarter ended 10/31/12. Royal Bank produced solid growth across all of its Canadian banking businesses. The company will report its next quarterly results today. If you would like my summary of the new results, just reply to this email and I will send the results to you.
The healthy Canadian economy will help Royal Bank to register an EPS increase of 6% during the 12 months ending 10/31/13. At 11.8 times my EPS forecast of 5.27, RY shares are undervalued. The recently increased dividend now provides shareholders with a generous yield of 4.0%. The high yield and strong balance sheet will limit stock price erosion.
I will continue to follow Royal Bank of Canada and other Canadian companies in my Cabot Benjamin Graham Value Letter. My April issue will focus on six new undervalued Canadian stocks.
Editors Note: You can find additional stocks selling at bargain prices in the Cabot Benjamin Graham Value Letter. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 250 stocks. Click here to get started today!
|Royal Bank of Canada (RY)
Royal Bank Plaza
200 Bay Street
Toronto, ON M5J 2J5 Canada
|Index Membership: N/A
Industry: Foreign Regional Banks
Full Time Employees: 74,377
2/28/13 Royal Bank of Canada (RY): Generous 4% Yield