Royal Bank of Canada: Dividend Safe Haven

The Royal Bank of Canada (RY) is the largest bank in Canada. With all the financials dropping all over the world thanks to the sub prime crisis, is this an opportunity to add Royal Bank of Canada to our portfolio of superior dividend yielding stocks? Let’s find out.

Note: This analysis will be done from Canadian data and is in Canadian dollars.

Company Profile:

From Yahoo Finance

Royal Bank of Canada [RBC] offers a range of banking and financial services in North America and internationally. Its services comprise personal and commercial banking, which include lending, leasing, deposit, and transaction products and services to small and medium-sized business, as well as to commercial, farming, and agriculture clients; wealth management services, such as investment and trust products and services through brokerage; asset management; trust services; investment counseling; and a range of life, creditor, health, travel, home, and auto insurance products and services to individuals and business clients. The bank also offers a range of corporate and investment banking, wealth management, sales and trading, research, and related products and services to corporations, governments, and institutional clients.

Yada, yada, yada. It’s a bank. It has a market capitalization of $ 67.14B.

Company Fundamentals:

With respect to its return on invested capital, management was able to deliver 15.3% last year and 12.2% over the last 5 years.

Return on equity has been improving since 2001. The 10 year average ROE is 17.33%. The 5 year average ROE is 18.29%. And last year’s ROE was 22.33%.

Equity growth rate has been consistent except for a lull in 2003 and 2004. The 9 year average equity growth rate is 9.9%. It drops to 6.01% over the last 5 years. The 3 year average rate is 7.54%, and last year’s rate was 11.01%.

Earnings per share growth rates have been increasing over the last 10 years. The 9 year average is 12.33%. That rate increases to 17.19% over the last 5 years. The 3 year rate is even better at 20.18%. And last year’s EPS growth rate remained consistent at 20.79%.

Sales growth rates have been quite robust over the last 2 years which leads to a nice up trend in the sales growth rates from a 5 year average rate of 7.25% to the 3 year rate of 9.76%, to last year’s rate of 15.6%.

For Canada’s largest bank, I would say the fundamentals look great.

Dividend Fundamentals:

RY has a current dividend yield of 3.49%. That is higher than the 2.43% dividend yield on the on the S&P/TSX Composite.

The Royal Bank has delivered an excellent dividend growth rate over the last 10 years. The 9 year average dividend growth rate is 15.67%! At 15%, the dividend doubles every 5 years. The 5 year rate is consistent at 15.84%. The 3 year rate is 18.5% and last year’s dividend growth rate was 22.55%. Fantastic dividend growth.

And the dividend payout ratio is not overly aggressive. It has climbed from 30% in 1997 to 39.02%. Still fairly conservative.

Cash flow growth rates have been increasing over the last 10 years. The 9 year rate is 10.33% and increases to 14.5% over the last 5 years.

Valuation Models:

Let’s put this stock through its paces with our 3 valuation techniques for dividend yielding stocks.

Looking at the historical dividend yields, I see a lot of consistency. The 10 year average high dividend yield is 3.46%. Over 5 years, it is 3.49%. And the current dividend yield is 3.49%. That means the stock is currently trading at its average high dividend yield. And in the past, investors have not allowed this stock price to drop lower based on the consistency of those average high dividend yields.

Now, Mr. Graham would differ on this observation. The Graham number works out to $38.66. At the current price of $52.75, that would be a premium of 36.45%.

For my discounted present value model, I used the following inputs:

future EPS growth rate of 6.01% (analysts have forecast 8.4%, but I prefer my more conservative estimate based on the historical equity growth rate)

future P/E of 12.01 (although the historically low P/E is 12.95, as an investor, I am only willing to pay a maximum P/E that is 2 times my future EPS growth rate)

dividend yield of 3.49% (the 5 year average high dividend yield)

future dividend growth rate of 15.84% (the 5 year average dividend growth rate)

With this information, I compute the model price to be $41.66. That implies a premium of 26.61% over today’s price.

See my RY calculations here.

Here is the 1 year stock price chart:

As you can see, RY has come off its highs in May and present an interesting buying opportunity.

Conclusion:

I would consider RY a good entrant in our portfolio of superior dividend yielding stocks. And from a yield perspective, it is looking like it is fairly priced. Will the price go lower? I would guess that it would and hopefully bring down the premium that was shown from the other two methods. But you would definitely be getting value at this price over the long run.

Full Disclosure: I do not own shares in RY.