2-for1 Sale
Royal Bank of Canada (TSX:RY) recently reported solid fiscal fourth-quarter (Q4) and full-year 2023 results, despite challenging economic conditions. The share price is now off the lows of the year and investors who missed the latest bounce are wondering if RY stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Royal Bank stock
Royal Bank trades near $125 per share at the time of writing compared to the 2023 bottom near $108, but it is still down considerably from the $147 it reached in January 2022 shortly before the Bank of Canada and the U.S. Federal Reserve started to aggressively raise interest rates.
Royal Bank is a giant in the Canadian banking sector and also ranks among the top 10 globally based on its market capitalization of close to $175 billion.
Royal Bank operations
The bank gets revenue from diverse segments and geographies. These include retail banking, commercial banking, capital markets, investor and treasury services, and insurance. Royal Bank’s largest presence remains in Canada where it hopes to get even bigger with its planned $13.5 billion purchase of HSBC Canada. The deal still has to get final government approval, but investors should find out in the coming weeks or in early 2024.
Royal Bank has also been active internationally. The company made a large wealth management acquisition in the U.K. last year with the $2.4 billion purchase of Brewin Dolphin. Previous to that, Royal Bank bought City National in the United States for US$5 billion in 2015.
Earnings
Royal Bank generated adjusted net income of $16.1 billion in fiscal 2023. This was a bit higher than the results for 2022. Adjusted earnings per share (EPS) rose 2% while return on equity (ROE) slipped to 15.5% from 16.6%.
Royal Bank has a significant capital cushion to ride out market turbulence that could be on the way if the economy slides into a deep recession next year or in 2025. The common equity tier one (CET1) ratio was 14.5% as of October 31. This is above the 11.5% required by the government. That being said, Royal Bank will use up a good chunk of the excess capital to pay for its takeover of HSBC Canada.
All of the large Canadian banks are increasing their provisions for credit losses (PCL). Royal Bank reported fiscal Q4 2023 PCL of $720 million, up 89% from the same period last year, as the bank saw increased stress in the loan portfolio as more customers struggled to make payments as interest rates rose. The PCL number looks big, but it is still very small relative to the size of the total loan book.
Dividend growth
Royal Bank just raised the dividend by 2%. This is the second increase in 2023. The decision suggests the management team is comfortable with the earnings outlook, even amid rising PCL.
Investors who buy RY stock at the current level can get a 4.4% dividend yield.
Should you buy now?
Royal Bank is a very profitable company that has delivered attractive long-term returns for buy-and-hold investors. The stock isn’t as cheap as it was a few weeks ago, but RY still deserves to be on the radar at the current price for a self-directed TFSA or RRSP portfolio.
That being said, investors should expect ongoing volatility, especially if the economy goes into a deep slump instead of the mild and short recession that most economists currently anticipate. Investors who are not convinced that the central banks are done hiking rates might want to take a half position at this level and look to add to the holdings on any new downside.
