Better Bank Stock for Long-Term Growth: RY or NA?

When you are betting on a stock long term, it’s a good idea to consider factors other than the obvious (growth pace, yield, etc.) to make an informed choice.

Adam Othman ❯

Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.

Published August 19, 2024 4:30 pm EDT

Canadian bank stocks are a standard part of most investors’ Tax-Free Savings Account (TFSA) — based passive-income portfolios. The reasons are that they offer a healthy combination of dividend sustainability, payout growth (as all of the Big Six are Aristocrats), and generous yields, especially if you buy during a slump.

However, two of the big six add another variable to the desirability equation of banking stocks: capital-appreciation potential.

These are the largest and the smallest of the Big Six bank stocks in Canada.

The largest bank stock in Canada

Royal Bank of Canada (TSX:RY) is not just one of the largest banks in North America but also the most valuable company in Canada. It has been around for and has paid dividends for well over one-and-a-half centuries, making it an old institution rooted deeply in the regional market.

As a stock, Royal Bank can be considered a solid addition to most Canadian portfolios for both dividends and growth. It has been growing its payouts for 12 consecutive years, a track record shared by many Big Six bank stocks. The yield is decent, at 3.7%, and was 4% up until a few months ago, but a solid bull run has caused the yield to shrink.

The capital-appreciation potential is quite decent as well. The stock has grown roughly 50% in the last five years, and even though the growth trajectory wasn’t very straight, the annualized growth of 10% a year is attractive enough. At that pace, the bank can double your capital in a decade.

The smallest of the Big Six banks in Canada

While it’s the smallest of the Big Six bank stocks in Canada, National Bank of Canada (TSX:NA) offers the best growth potential, at least if we compare the banks based on their performance in the last decade. Even if we stick to the previous five years, National Bank grew by about 87%, significantly higher than the Royal Bank. At this pace, the stock may double your capital in about six years.

Despite its much more prominent growth, the stock has an edge regarding dividends. The yield is slightly higher at 3.8%. If we look at the price-to-earnings ratio, the valuation is also more attractive at 11.9 compared to Royal Bank’s 13.8.

Foolish takeaway

At the time of writing this, the National Bank of Canada has a clear edge over the Royal Bank, and even if we consider the long-term growth potential, National Bank has a clear advantage. However, that doesn’t automatically make it the better pick of the two as long-term holdings.

Royal Bank is more stable, has a much larger market share, and may prove more resilient than a more geographically concentrated (relatively) entity like National Bank. So, for now, and anticipating a healthy market, National Bank might be the better pick, but Royal Bank is just a little behind.