With earnings that beat expectations and strong wealth management gains, this Big Five bank has announced its latest dividend hike.
The bank now gets almost a quarter of its revenue from the U.S. thanks to its 2015 acquisition of a Los Angeles lender catering to high-net-worth clients. In the meantime, savings stemming from its greater emphasis on online banking—and the closing of more branches—give it plenty of room for future dividend increases.
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ROYAL BANK OF CANADA (Toronto symbol RY; www.rbc.com) is Canada’s largest bank, with assets of $1.28 trillion.
With the May 2018 payment, Royal will raise its quarterly dividend by 3.3%, to $0.94 a share from $0.91. The new annual rate of $3.76 yields 3.7%. Including the latest increase, the bank’s dividend has grown an average of 8.3% annually over the last 5 years.
The bank also reported that its overall earnings in the quarter ended January 31, 2018, fell 0.5%, to $3.01 billion from $3.03 billion a year earlier. But due to fewer shares outstanding, earnings per share gained 2.0%, to $2.01 from $1.97.
If you exclude a charge related to the new U.S. tax rules, Royal earned $2.13 a share in the latest quarter. That beat the consensus estimate of $1.99.
Earnings from Royal’s retail banking (47% of the total) fell 4.5% due to the sale of an insurance business. On a comparable basis, earnings gained 10% due to higher demand for loans and interest rates. Its capital markets business (23%) saw earnings rise 13.0% due to lower loan-loss provisions and tax rates. The wealth management business (19%) reported a 38.8% jump in earnings as rising stock prices pushed up the value of the securities it manages. As well, earnings from Royal’s investor and treasury services (5%) gained 2.3% on higher client deposits and demand for other services. However, earnings at Royal’s insurance operations (4%) fell 5.2% on higher claims for its international operations.
Revenue in the quarter improved 12.3%, to $10.8 billion from $9.6 billion. Royal set aside $334 million to cover potential bad loans in the latest quarter, up 13.6% from $294 million a year earlier. That’s due to higher projected losses on loans at its capital markets division.
Blue Chip Stocks: Bank trades at just 12.1 times forecast 2018 earnings
In November 2015, Royal acquired Los Angeles-based City National Bank for $5.5 billion U.S. That firm lends to wealthy individuals and businesses in the entertainment, technology and health-care industries. Thanks to that acquisition, the U.S. now supplies 23% of Royal’s total revenue. Canada remains its largest market at 60% of revenue, and other countries supply 17%.
City National operates few branches, which helps keep its operating costs down. That business should also benefit from rising interest rates and cost savings following the takeover by Royal. As a result, City National’s pre-tax earnings will probably jump from $400 million U.S. in the fiscal year ended October 31, 2015, to around $1.0 billion U.S. for fiscal 2020.
In January 2018, the Bank of Canada increased its benchmark interest rate from 1.00% to 1.25%. Higher interest rates could hurt demand for new loans and lead to higher defaults on existing loans. However, insured mortgages represented a high 41% of Royal’s Canadian loan portfolio of $272.1 billion (as of January 1, 2018). That reduces any risk due to a possible slump in housing prices.
The bank continues to focus on online banking and to close physical branches. Thanks to the savings, its efficiency ratio (non-interest costs divided by revenue—the lower, the better) improved to 58.0% in the first quarter of 2018 from 60.0% in fiscal 2017.
Royal will likely earn $8.43 a share in fiscal 2018, and the stock trades at 12.1 times that forecast.
Recommendation in TSI Dividend Advisor: Royal Bank is a buy.
In a recent report you state that TRP is working on the Energy East Pipeline when they announced on Oct 5, 2017 that the company will no longer proceed with this project.
Were you aware?
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In a recent report you state that TRP is working on the Energy East Pipeline when they announced on Oct 5, 2017 that the company will no longer proceed with this project.
Were you aware?
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