Are you big-yield hunting? You'll find your quarry in the Great White North. As we explain below, Canada's biggest bank, Royal Bank of Canada (RY - Get Report) is a safe, reliable income-generator that's given short shrift by American investors. We explain why it belongs in your dividend portfolio.
RBC is the largest bank in Canada by assets (C$1.15 trillion). Founded in Nova Scotia in 1864, this diversified financial services behemoth boasts a market cap of C$90.9 billion and a vast global reach with operations in 37 countries.
It is an income-producing gem. Shares of the bank rose slightly in Wednesday trading.
Its performance comes as volatile stock markets, historically low interest rates, onerous energy sector debt, and stricter regulations born of the great financial crisis have all dampened trading volumes and earnings for the six biggest U.S. banks: Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Wells Fargo (WFC - Get Report) . True, most of these banks beat expectations for second-quarter earnings, but analysts had set the bar low.
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The Federal Reserve is unlikely to raise interest rates before the end of the year, if then. Low interest rates make it difficult for banks to earn money on loans, while the current, depressed oil prices impede the ability of energy companies to generate enough revenue to service their debt.
Still, wise investors should hold at least one financial services stock.
RBC is scheduled to release second-quarter operating results on Aug. 25. The average analyst estimate is that earnings per share (EPS) will come in at C$1.29, compared to C$1.68 a year ago. The year-over-year decline mostly stems from energy loans turning sour, but analysts are underestimating the bank's steady success in mitigating this burden.
When investors consider Canada, their first thoughts turn to natural resources, chiefly oil and gas. To be sure, RBC is akin to most U.S. banks in that it has exposure to the beleaguered energy sector, but the Toronto-based bank is getting a handle on these loans and they represent a shrinking presence on its balance sheet. The bank's drawn loans to energy companies are now down to about C$8.4 billion, or only 1.6% of its total loan book. That's lower than many of its U.S. counterparts, including Bank of America at 2% and Wells Fargo at 1.9%.
RBC also has a firm grip on its C$13.7 billion of undrawn commitments (i.e., credit lines) to struggling companies in Canada's energy patch. RBC has slashed the amount of credit available to some oil and gas firms by 15% to 20%, while at the same time targeting growth opportunities such as wealth management, a value-added service that affords not only new sources of fees but also higher profit margins.
To support its strategic pivot to wealth management, RBC late last year closed its acquisition of Los Angeles-based City National for $5.4 billion (U.S.) in cash and stock. Dubbed the "bank to the stars," City National is the biggest bank in Los Angeles with a roster of wealthy clients that nicely dovetails with RBC's fast-growing wealth management division.
RBC also boasts a juicy dividend yield of 4.15%, far higher than any of the six-largest U.S. banks. The bank's broad revenue base will continue to sustain earnings, even as energy lenders suffer. RBC's EPS is estimated to reach C$5.38 in fiscal 2017, compared to C$5.11 in 2016.
Over the past five years, RBC has hiked its payout by 62%. What's more, RBC's trailing 12-month price-to-earnings (P/E) ratio is only 11.98, which compares favorably to Bank of America (12.71), Wells Fargo (12.06), Goldman Sachs (15.48), and money center banks as a whole (15.48). Looking for high and sustainable income? Go north.
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