RBC Stock Price: Is Royal Bank of Canada (TSX:RY) a Buy?

With interest rates set to rise, could Royal Bank of Canada (TSX:RY)(NYSE:RY) be a buy?

| More on:

Royal Bank of Canada (TSX:RY)(NYSE:RY) is a stock I have a brief but profitable history with. I bought it earlier this year when TSX banks were rallying and grabbed a quick 11% gain in a few weeks. Sensing more value elsewhere, I sold the stock and invested the proceeds in another stock.

It ended up being a mistake. The stock I bought with my RY sales proceeds went down 10%. I then sold that stock and bought into another Canadian bank: Toronto-Dominion Bank (TSX:TD)(NYSE:TD). TD Bank has since gone on to deliver solid returns for me.

As you might have guessed, TD Bank is my favourite Canadian bank stock right now. I’ve bought the stock three times now, and I may be going in for a fourth buy shortly. But still, I think the Royal Bank of Canada is a pretty good investment. Trading at just 12 times earnings, it’s a classic value play that any income-oriented investor could make good money off.

Valuation

The core of any bullish thesis on Royal Bank–and Canadian banks in general–rests on valuation. Nobody argues that Canadian banks are likely to produce frothy growth, but they are pretty cheap relative to what growth they do have. Royal Bank of Canada is quite inexpensive, with metrics like:

  • Adjusted P/E: 12.3.
  • GAAP P/E: 12.5.
  • Price to sales: 3.9.
  • Price to operating cash flow: 3.8.

These are all pretty solid value metrics. In addition, the stock has a 3.85% dividend yield, which indicates that there’s a fair amount of dividend income to be had by buying it.

Growth

Next, we can look at Royal Bank’s historical growth and future growth prospects.

For the most recent 12-month period, RY’s revenue grew by 12.7%. Its earnings grew 36.4%. The strong growth for the trailing 12-month period is due to the economic recovery from COVID-19. The pandemic caused banks some trouble in 2020. This year, they are recovering from the damage they took last year. In other words, the 36.4% earnings growth isn’t as good as it looks: it reflects a bounceback from an extremely bad year.

Still, the 9% compound average growth in earnings isn’t bad at all. When you combine value, growth, and dividend yield, you’ve got the makings of a solid income play here.

Finally, there’s the matter of future growth. Canadian banks usually deliver “slow and steady growth,” which is to be expected because they collectively have saturated the Canadian financial services market. And there is one catalyst that could take growth higher: interest rate hikes. Banks earn higher profit margins on loans when interest rates go up.

If people keep taking out loans in a higher interest rate environment, bank earnings may rise. This isn’t guaranteed to happen: the higher rates could discourage borrowing. But the margins, at least, will rise. This is why bank stockholders should be optimistic that the Bank of Canada is set to raise interest rates. Banks are among the few classes of stocks that can gain from rate hikes.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button owns shares of The Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Bank Stocks

Best Stock to Buy Right Now: TD Bank or Manulife Financial?

Manulife continues to see momentum in its business and stock price, while TD Bank stock remains down and out.

Read more »

cloud computing
Tech Stocks

3 No-Brainer Tech Stocks to Buy With $1,000 Right Now

These three Canadian tech stocks could be among the best growth opportunities in the market right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

Canadian Dollars bills
Metals and Mining Stocks

2 Cheap Canadian Stocks Under $20 to Buy This November

Cheap TSX stocks such as Endeavour Silver are trading at an attractive valuation in November 2024.

Read more »

happy woman throws cash
Tech Stocks

3 Growth Stocks That Could Be Long-Term Wealth Creators

These three growth stocks aim to grow their financials at a higher rate than the industry average, thus delivering superior…

Read more »

how to save money
Bank Stocks

This 5.9% Dividend Stock Pays Cash Every Month

First National Financial (TSX:FN) has a 5.9% yielding dividend that is paid out monthly.

Read more »

gift is bigger than the other
Investing

The Best Canadian Stocks to Buy With $5,000

These Canadian companies have solid growth prospects and the ability to deliver profitable growth even at a large scale.

Read more »