Valued at a market cap of $192 billion, the Royal Bank of Canada (TSX:RY) is the largest company trading on the TSX. The Canadian banking giant has delivered steady returns to shareholders over time. Since March 2004, RBC stock has returned 330.5% to investors. After adjusting for dividends total returns are much higher at 807%. Comparatively, the TSX index has returned “just” 337% to shareholders in dividend-adjusted gains since March 2004.
Despite its outsized gains, RBC stock trades 9% below all-time highs, allowing you to buy the dip and benefit from a tasty dividend yield of over 4%. Let’s see if RBC stock can continue to deliver game-changing returns to investors in 2024 and beyond.
How did RBC perform in fiscal Q1 of 2024?
Royal Bank of Canada reported adjusted earnings of $4.1 billion, or $2.85 per share, above consensus estimates of $2.06 per share. Its results were driven by higher fee-based revenue in Wealth Management, including strong flows in its advisory business and robust performance in the asset management vertical.
RBC emphasized client-driven volume growth in Canadian Banking offset escalating competitive pricing pressures while capital markets reported strong pre-provision pre-tax earnings of $1.3 billion. Crucially, RBC’s core expense growth continued to decelerate, boosting profit margins amid an uncertain macro backdrop.
RBC’s diversified line of businesses helped it mitigate the increases in provisions for credit losses (PCLs) in segments such as commercial real estate and unsecured retail. Due to a prudent risk-management framework and rigorous stress testing processes, PCLs and impaired loans are expected to remain within the guidance provided in the last quarter.
RBC emphasized its strong capital position provides it with the flexibility to accommodate for any deterioration in credit quality. It added $133 million of PCL on performing loans in the first quarter (Q1), increasing the ratio of allowance for credit losses to 64 basis points.
RBC’s balance sheet strength is underscored by a robust common equity tier-one (CET1) ratio of 14.9%, an increase of 220 basis points year over year. The CET1 ratio measures a bank’s ability to withstand economic shocks, and a higher ratio is favourable.
The banking heavyweight ended Q1 with a liquidity coverage ratio of 132%, translating to a $94 billion surplus above the regulatory minimum.
RBC’s diversified business model and scale positions it to deliver value to shareholders across market cycles. As inflation cools down, interest rates should move lower, leading to higher loan demand in several verticals.
Is RBC stock undervalued?
A key driver for RBC is its wealth management business, which is a high-margin segment. The wealth management business manages $1.6 trillion in total assets, an increase of 12% year over year. Its Canadian and U.S. wealth advisory business generated $28 billion in net sales in the last 12 months, accounting for 50% of total sales.
RBC’s profit margins might remain under pressure in the near term as interest rates are quite high. But it is forecast to increase adjusted earnings by 7% year over year to $12.1 per share in fiscal 2025.
Priced at 11 times forward earnings, RBC stock is quite cheap, given its earnings growth forecast and high dividend yield.
