In Canada, we have some of the best financial institutions in the world. These companies are collective known as the big 5 banks. These 5 banks are Bank of Nova Scotia (BNS), Royal Bank of Canada (RY), Toronto Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM), and Bank of Montreal (BMO). These banks trade on the Toronto Stock Exchange and the New York Stock Exchange.
Every time the banks report earnings, I often hear people complain about the banks making so much money. I just filter out this "negative" view by people. The positive is that the banks can be great investments as the increased earnings often mean dividend increases for their shareholders.
In Canada, any bank is not allowed to have a shareholder larger than 10% of the company .A shareholder can be a mutual fund, an individual or a corporation such as a holding company.
Royal Bank of Canada (RY)
Royal Bank of Canada, aka Royal Bank, operates in traditional banking, insurance, wealth management, investor and treasuries services, and capital markets. Royal Bank is truly a global bank and his the largest of the 5 big banks by market capitalization. Royal Bank operates in Canada, the United States, and in 35 other countries serving their 16 million plus clients.
Royal Bank grew total revenue from $21.582 billion in 2008 to $40.669 billion in 2017. That is a compound annual growth rate (CAGR) of 7.29%.
This CAGR of revenues is impressive considering this includes the great recession at the start of this period. Royal Bank did not escape the financial crisis unscathed so this is quite impressive.
With the world's population increasing along with more and more people realizing that they have to take a more proactive approach to their finances, should keep the revenues flowing in. See, the baby boom generation and definitely the generation before that, could go work a job and stay at that job for their entire working years. Fast forward to people starting their work careers in the 1970s and beyond, job security has become a myth. Also in the 1970s, people started becoming responsible for their own retirement instead of receiving a pension from the company they worked for. People now have more jobs during their working lifetime and some have more than one job at a time.
Royal Bank grew earnings per share from $3.38 in fiscal year 2008 to $7.56 in fiscal year 2017. This represents a CAGR of 9.36%.
Over the 10 period from 2008 to 2017, interest rates in Canada and the United States were extremely low. This leads to more and more people borrowing money due to the lower interest rates. The Federal Reserve Bank, aka The Fed, determines the rate of interest that bank charges on its loans and mortgages in the United States. The Fed announces quarterly that they will increase or decrease the rate by a percentage or leave the rate the same. Similarly in Canada, the Bank of Canada does the same. These rates are a starting point, meaning the rates of interest are higher on loans and mortgages. If an individual or company has a fixed rate loan or mortgage, their rate does not change. In Canada, their mortgage interest rate will change when the mortgage is renewed at the end of the 1yr, 3yr or 5yr term.
With positive earnings, an dividend growth investor looks for a share of the profits via dividends.
Royal Bank has increased their dividend for the past 8 years. Prior to this the bank did not raise or lower their dividend during the financial crisis.
The 5 year dividend growth rate comes in at 8.30%. This is well above the rate of inflation.
The current dividend payout ratio is 48.14%. This is near ideal payout ratio of 50%. It means the dividend is easily covered.
The current yield of the stock is 3.75%. This is on par for the stock's own 5 year average and greater than the broader market over the same time. The broader market here is the S&P TSX Composite Index.
Every time the banks report earnings, I often hear people complain about the banks making so much money. I just filter out this "negative" view by people. The positive is that the banks can be great investments as the increased earnings often mean dividend increases for their shareholders.
In Canada, any bank is not allowed to have a shareholder larger than 10% of the company .A shareholder can be a mutual fund, an individual or a corporation such as a holding company.
Royal Bank of Canada (RY)
Royal Bank of Canada, aka Royal Bank, operates in traditional banking, insurance, wealth management, investor and treasuries services, and capital markets. Royal Bank is truly a global bank and his the largest of the 5 big banks by market capitalization. Royal Bank operates in Canada, the United States, and in 35 other countries serving their 16 million plus clients.
Royal Bank grew total revenue from $21.582 billion in 2008 to $40.669 billion in 2017. That is a compound annual growth rate (CAGR) of 7.29%.
This CAGR of revenues is impressive considering this includes the great recession at the start of this period. Royal Bank did not escape the financial crisis unscathed so this is quite impressive.
With the world's population increasing along with more and more people realizing that they have to take a more proactive approach to their finances, should keep the revenues flowing in. See, the baby boom generation and definitely the generation before that, could go work a job and stay at that job for their entire working years. Fast forward to people starting their work careers in the 1970s and beyond, job security has become a myth. Also in the 1970s, people started becoming responsible for their own retirement instead of receiving a pension from the company they worked for. People now have more jobs during their working lifetime and some have more than one job at a time.
Royal Bank grew earnings per share from $3.38 in fiscal year 2008 to $7.56 in fiscal year 2017. This represents a CAGR of 9.36%.
Over the 10 period from 2008 to 2017, interest rates in Canada and the United States were extremely low. This leads to more and more people borrowing money due to the lower interest rates. The Federal Reserve Bank, aka The Fed, determines the rate of interest that bank charges on its loans and mortgages in the United States. The Fed announces quarterly that they will increase or decrease the rate by a percentage or leave the rate the same. Similarly in Canada, the Bank of Canada does the same. These rates are a starting point, meaning the rates of interest are higher on loans and mortgages. If an individual or company has a fixed rate loan or mortgage, their rate does not change. In Canada, their mortgage interest rate will change when the mortgage is renewed at the end of the 1yr, 3yr or 5yr term.
With positive earnings, an dividend growth investor looks for a share of the profits via dividends.
Royal Bank has increased their dividend for the past 8 years. Prior to this the bank did not raise or lower their dividend during the financial crisis.
The 5 year dividend growth rate comes in at 8.30%. This is well above the rate of inflation.
The current dividend payout ratio is 48.14%. This is near ideal payout ratio of 50%. It means the dividend is easily covered.
The current yield of the stock is 3.75%. This is on par for the stock's own 5 year average and greater than the broader market over the same time. The broader market here is the S&P TSX Composite Index.
The long-term debt ratio of Royal Bank comes in at 0.125. The interest coverage ratio comes in at 5.17.
The margin is excellent as expected for a bank. Banks make huge margins due to the ability to take savers money via deposits and turn around and loan that out at a higher interest rate. Another source of income comes from insurance premiums. Unless a major catastrophe occurring like a damaging hurricane, the float can be reinvest to make more income.
Now, let's look at the valuation.
The stock is currently trading at a P/E of 12.8. This is slightly higher the 5 year industry average and the stock's own 5 year average of 12.5.
Investors are currently paying approximately 6 times cash flow, which is roughly equivalent to the 3 year average P/CF of 5.2.
Valuing a stock is not an exact science. The exact intrinsic value of a stock cannot be determined. An investor can use some tools to help them determine a fair value of a stock making assumptions of where they think the company is going in the future.
I am now going to do a dividend discount model analysis for my valuation. I going to assume a 10 year dividend growth rate of 6.5% and going to use a discounted rate of 10%.
The dividend growth rate of 6.5% is reasonable as a recession is likely to occur in the next 1.5 to 3 years, so people will not borrow money easily. The Fed and the Bank of Canada have been slowly raising interest rates over the last year to slow the economy.
The Dividend Discount Analysis results in a fair value of $114.41
I do not want to rely on just this for valuation. Morningstar currently rates it as a 3-star stock and a fair valuation of $107.00
We take the average of these 2 valuations, to get a fair price of $110.71.
The stock is currently trading at $100.27, which means this stock is approximately 10% undervalued.
Summary:
Royal Bank is a solid company that has greatly awarded investors in the the past. The stock is currently yield about 3.6% and the dividend was increased roughly 8% over the last year. Royal Bank has been raising their dividend every 2 quarters in recent years. The stock appears to be roughly 10% undervalued. I will monitor this stock for a future investment.
Disclosure: - Do not own RY.TO currently, but owned it in the past.
- Long BMO.TO, CM.TO, BNS.TO
DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk
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