Is RY the Canadian Bank to Own?

RY - Royal Bank of CanadaRoyal Bank of Canada is the largest Canadian bank by market capitalization. During 2016, the stock appreciated by 20% and so far this year, it has accumulated another 4.5% with a high of 8% at the time of writing. Not only is there good stock growth, the dividend yield is also very good at 3.66%. It is well known that Canadian banks make for solid investments and the question most investors ask themselves is which bank they should buy?

RY Business Summary

Royal Bank of Canada TSE:RYNYSE:RY  and its subsidiaries operate under the master brand name RBC.

  • RBC is one of Canada’s largest banks and one of the largest banks in the world, based on market capitalization.
  • RBC is one of North America’s leading diversified financial services companies, and provide personal and commercial banking, wealth management, insurance, investor services and capital markets products and services on a global basis.
  • RBC employs over 80,000 full- and part-time employees who serve more than 16 million personal, business, public sector and institutional clients through offices in Canada, the U.S. and 35 other countries.

RBC is focused on executing the following strategy:

Our strategy is deeply rooted in our commitment to clients and communities. Our vision and goals reflect our long-term focus, and our values guide our day-to-day actions. In a rapidly changing environment, we have capabilities, strengths and a diversified business model that position us well to achieve continued growth.

By the numbers,

RY Revenue

RY had a strong quarter for FY2017Q1 with net income at $3,017 million for an increase of 24% over the same quarter a year ago.

The revenue streams are outlined below with a geographical distribution. Canada continues to be the primary source of income and RY continues to strive to be the undisputed leader in financial services. The business may be an oligopoly but there is still competition with other financial institutions such as BMO TSE:BMONYSE:BMO and CIBC TSE:CMNYSE:CM .

RY - Earnings Distribution
Source: 2016 Annual Report
RY - Earnings Growth
Source: RBC Investor Presentation

On the Basel III requirements, RY is well-capitalized with a Common Equity Tier 1 (CET1) Ratio of 11% as of January 31, 2017.

RY Dividend Summary

The Royal Bank of Canada is a Canadian Dividend Aristocrats with 6 consecutive years of dividend increases. Not that impressive but it’s a start and the minimum for the Canadian list. RY is boasting an 8.45% CAGR dividend growth over the past 10 years, which is consistent when compared with the past 3 and 5 years.

  • 3 year average of 8.59%
  • 5 year average of 9.27%
  • 10 year average of 8.45%

I like to look at the growth of dividends against the EPS has it shows if the earnings from the company are keeping up with the dividends. If it’s not, then it’s a warning sign to look further into that. RY is right in line with the earnings after they got back in control from the financial crisis. It shows they have momentum and even have room to growth their dividend more if they wanted (or buyback shares for stock appreciation).

RY - Dividend & EPS
Source: Financial Reports

The numbers point to Royal Bank being in control and focused on growing their business. The payout ratio is flat since 2011 which shows management has been in control. Below is the average historical payout ratio over the past 10 years.

  • 3 year average of 45.99%
  • 5 year average of 45.94%
  • 10 year average of 52.88%

Investment Philosophy #1: BUSINESS QUALITY

RY is the largest Canadian bank and has maintained the title for many years now. While 62% of their business is based on the Canadian banking oligopoly, 22% of the business can grow further with the improved US economy and 16% is international. The ratios outline strength and consistent growth within Canada and offers accelerated growth in the US with the growing economy.

Here is what a strong business can do for your money. If you had invested $1,000 in RY 10 years ago, it would be worth $2,146 for a 8.19% compound annual growth rate (CAGR).

RY - CAGR Growth

Investing Opportunity Score: 64%

Based on my Opportunity Score formula, RY TSE:RYNYSE:RY has a score of 64% (the higher the better) for being an investing opportunity. Above 60% is a good range to pay attention to an opportunity. Anything around 80% will have a short window of opportunity unless the stock got beaten down for other qualitative reasons.

The combination of stock appreciation and dividend growth make RY a great dividend growth stock. It may be the best bet out of the big five banks. Only TD TSE:TDNYSE:TD  has a comparative Chowder score and it’s not that much higher.

Do you want to find out where the competitors stack up against RY? There are 25 stocks in the financial sector to be compared. Subscribe to the Dividend Performance List over at Dividend Snapshot and easily compare many key stock data points before making your next investment.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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