Investors considering buying a bank stock typically focus on the major U.S. banks such as JP Morgan Chase (JPM) or Wells Fargo (WFC).
While these are certainly strong companies, investors shouldn't overlook Canadian banks, which have exhibited strong growth of their own in recent years.
Even better, many Canadian banks pay significantly higher dividend yields than their U.S. counterparts. For example, Royal Bank of Canada (RY) has a nearly 4% dividend yield. The stock also has long-term growth potential, making RBC one of the best Canadian bank stocks today.
Business Overview & Recent Earnings Report
The Royal Bank of Canada, otherwise known as RBC, is the largest bank in Canada by market capitalization, and the country’s second-largest bank by total assets, behind the Toronto-Dominion Bank (TD). RBC offers banking and financial services to customers primarily in Canada and the U.S., operating in five business units: Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services, and Capital Markets.
RBC reported strong second-quarter results on May 23. Revenue increased 14% from the same quarter last year, while net income increased 6% and diluted earnings-per-share grew 7%. Growth was due to strong performance in Capital Markets, Personal & Commercial Banking, and Wealth Management. RBC generated a very strong return on equity of 17.5%. Provisions for credit losses (PCL) moved materially higher, gaining 55% in Q2 due to higher PCL on impaired loans on a couple of accounts in its Canadian Banking commercial portfolio. However, the bank’s ongoing credit quality still remains strong.
One potential headwind going forward is that interest rates are no longer rising, and have begun to dip again due to the possibility of slowing global economic growth. Banks benefit from rising interest rates because it widens their net interest margin, or the spread between interest paid on deposits versus interest collected on loans. Last quarter, RBC’s year over year net interest margin declined slightly from 1.68% to 1.64%.
However, the economic climate broadly remains supportive of growth. As long as the global economy stays out of recession, RBC will benefit from loan growth and higher client activity in wealth management.
RBC recently declared a dividend of $1.02 per share in Canadian dollars, representing an 8.5% increase from the same quarterly payout in 2018. RBC is an ideal mix of dividend yield and growth. In U.S. dollars, the forward annualized dividend rate of roughly $3 per share represents a dividend yield of 4%.
As the S&P 500 Index yields ~2% on average, RBC is an attractive stock for income, as it provides shareholders with twice the dividend income as the broader market index. And, RBC is a dividend growth company, thanks to its strong fundamentals and positive future growth outlook.
Importantly, RBC’s dividend appears quite safe. The company has a projected dividend payout ratio of 45% for 2019. With a payout ratio of less than half of forecasted EPS, the dividend is well-covered, with room for additional dividend hikes each year. As a result, investors looking to increase exposure to bank stocks should not forget about Canadian banks such as RBC, a quality business with a high dividend yield.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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