Royal Bank of Canada (TSX:RY) has a proven track record of earnings growth and the second-highest return on equity of Canada’s Big 5 Banks over the past two years
SmallCapPower | May 3, 2018: Royal Bank of Canada (TSX:RY) (NYSE:RY) is one of the leading banks in Canada, providing financial services across the globe. The Company operates in five business segments – Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services, and Capital Markets. Established in 1864, Royal Bank of Canada (RBC) is headquartered in Toronto, Canada. The Bank serves 16 million clients in Canada, United States and 34 other countries through 81,000+ full- and part-time employees.
The bank’s presence across Canada, U.S. and other geographies bodes well for its future. The Company’s consistent earnings and dividend growth profile make it compelling for long-term investors. Currently, Royal Bank of Canada trades at a market capitalization of $140.23 billion on the TSX with price-to-book multiple of 2.1x, in-line with its Canadian peers.
Investment Thesis
- Market leader in financial services
- Diversified business model
- Robust financial profile
Market leader in financial services
Royal Bank of Canada is a market leader across all its key businesses in Canada. It is one of the 15 largest global banks by market capitalization with operations in 36 countries. The bank serves more than 16 million clients across the globe through 81,000 employees. RBC aims to be the undisputed leader in financial services in Canada and to be the preferred partner to corporate, institutional, and high net worth clients across the United States.
The bank has focused on continuous innovation and has been able to adapt to changing industry trends. Royal Bank of Canada has invested in technology in order to achieve efficiencies and deliver a superior client experience. RBC’s product offerings are being simplified, digitized, and personalized to provide easy-to-use solutions for its customers.
Diversified business model
Royal Bank of Canada has a diversified business model across various segments and geographies. With a presence worldwide in several countries, the bank is in an advantageous position to benefit from the opportunities created by changing market dynamics and economic conditions. This should allow the Royal Bank of Canada to fulfill the needs of its clients and develop deep, long-term relationships. By geography, 61% of total revenue is generated from Canada, which makes it vulnerable to the potential slowdown in Canadian economic growth. In terms of operating segments, Personal & Commercial Banking is the highest contributor (48%) to consolidated revenues.
Robust financial profile
Royal Bank of Canada has a proven track record of earnings growth and the second-highest return on equity (ROE), at 17%, of Canada’s Big 5 Banks over the past two years, according to Bloomberg, on the back of prudent capital allocation. RBC has a strong corporate debt rating– rated A1 by Moody’s, AA- by S&P, and AA by Fitch – which strengthen its position as prudent leader in financial services domain.
Furthermore, Royal Bank of Canada has been paying dividends to its shareholders consistently, which signifies steady and healthy financial performance. In fact, it is one of the few stocks that has paid a dividend for more than 100 years. RBC’s rising dividend payout is driven by earnings growth, with its payout ratio remaining stable in the range of 40% – 50%. The dividend CAGR is 7% since 2008, exhibiting reliable growth and rising dividend income for shareholders.
Outlook and Valuation
In terms of valuation, Royal Bank of Canada stock trades at a market capitalization of $140.23 billion on the TSX with price-to-book multiple of 2.1x. The bank’s services across various business segments and operations in several geographies coupled with a strong financial profile makes it a compelling buy for long-term investors.
Disclosure: Neither the author nor his family own shares in the company mentioned above.
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