ROYAL BANK OF CANADA $66 (Toronto symbol RY; Conservative Growth and Income Portfolios, Finance sector; Shares outstanding: 1.5 billion; Market cap: $99.0 billion; Price-to-sales ratio: 2.9; Dividend yield: 4.8%; TSINetwork Rating: Above Average; www.rbc.com) is selling its RBC General Insurance subsidiary to Aviva Canada.
This business mainly sells home and auto insurance. As part of the sale, Royal’s customers can also access all of Aviva’s insurance products for the next 15 years.
The sale makes sense, as regulators prevent Canadian banks from selling insurance policies through their branches. That limits Royal’s ability to expand this business. However, the bank will continue to sell life and health insurance through separate offices and online.
Royal will realize $200-million after-tax gain when it completes the sale later this year.
The bank also recently completed its purchase of Los Angeles-based City National for $5.4 billion U.S. (50% in cash and 50% in shares).
This firm lends to both wealthy individuals and businesses in the entertainment, technology and health care industries. It will start contributing to the bank’s earnings in two years.
Higher earnings will give Royal more room to keep raising its dividend; the current annual rate of $3.16 a share yields 4.8%. In its 2015 fiscal year, which ended October 31, 2015, the bank paid out 46% of its earnings, which is just above the midpoint of its 40% to 50% target range.
The stock is down 19% from its recent peak of $81 in April 2015. That’s partly due to worries that low oil prices will lead to higher loan writedowns. However, loans to oil and gas producers account for just 2% of the bank’s total loan portfolio. The stock now trades at a low 9.6 times Royal’s forecast fiscal 2016 earnings of $6.84 share.
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