Royal Bank of Canada is celebrated as a conservative, blue-chip stock offering a dependable dividend yield.

But there’s more. It has also returned our investors a massive 2,052.3% gain since we first recommended it in April 1995. That gain dramatically outpaced the 456.9% rise for the S&P/TSX Composite index.

Why buy now? Current uncertainty caused by rising interest rates and still-high inflation has prompted Canada’s big banks to increase their loan-loss provisions.

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Those provisions remain well below their 2020 pandemic peaks. Still, the impact on earnings impacts valuations and that only increases the current buying opportunity.

The stock trades at modest 13.8 times forecast earnings. That’s cheap for such a solid business

ROYAL BANK OF CANADA (Toronto symbol RY; www.rbc.com) has now completed its $13.5-billion purchase of the Canadian operations of U.K.-based HSBC Holdings plc (New York symbol HSBC).

HSBC operates 130 branches that mainly cater to businesses in industries that trade and bank internationally. It also provides banking and wealth management services to about 780,000 retail clients. In all, it had total assets of $134 billion.

Royal plans to convert most of those HSBC branches to its own banner. HSBC clients will also receive new accounts and credit cards.

In all, the bank now expects it will cost $1.5 billion to integrate the new operations. However, it expects to realize annual cost savings of $740 million by the end of the second year.

Due to the small size of the Canadian banking market, Royal prefers to expand internationally. For example, in 2015 it acquired Los Angeles-based City National Bank for $5.5 billion U.S. in cash and shares. City National lends to wealthy individuals as well as businesses in the entertainment, technology and health-care industries.

That acquisition is a big reason why overall revenue rose 20.5% for Royal, from $40.67 billion in 2017 to $48.99 billion in 2022 (fiscal years end October 31). In fiscal 2023, revenue then rose a further 14.6%, to $56.13 billion.

Overall earnings gained 12.5%, from $11.43 billion in 2017 to $12.86 billion in 2019; due to fewer shares outstanding, earnings per share rose at a faster rate of 15.7%, from $7.56 to $8.75.

Royal set aside $4.35 billion to cover potential loan defaults in fiscal 2020 due to the uncertainty over COVID-19; that was up 133.4% from $1.86 billion in 2019. As a result of the spike, earnings in 2020 fell 11.1% to $11.44 billion, while earnings per share declined 10.6% to $7.82.

However, Royal was reversing those provisions as the economy re-opened. As a result, earnings in 2021 jumped 40.3%, to $16.04 billion; per-share earnings rose 41.4% to $11.06. In fiscal 2022, earnings then dropped 1.5%, to $15.81 billion, or $11.06 a share (on fewer shares outstanding). The reduced profit reflected lower results in Capital Markets and Insurance, partially offset by higher earnings in Personal & Commercial Banking, Wealth Management, and Investor & Treasury Services. The current year also reflects lower releases of provisions on performing loans than a year ago. In fiscal 2023, earnings then dropped a further 6.0%, to $14.87 billion, or $10.50 a share. That decline was mostly due to a higher provision for credit losses.

Value Stocks: Earnings beat the consensus estimate despite higher loan-loss provisions for Royal Bank of Canada

In its fiscal 2024 second quarter, ended April 30, 2024, Royal’s revenue rose 13.7%, to $14.15 billion from $12.45 billion a year earlier. That topped the consensus forecast of $13.53 billion.

The newly acquired HSBC operations contributed $245 million to that gain. The bank also benefited from higher loan volumes and deposits.

The HSBC purchase also increased Royal’s loan-loss provisions by 53.3%, to $920 million from $600 million a year earlier.

Despite the higher provisions, earnings before unusual items gained 11.0% in the latest quarter, to $4.13 billion from $3.72 billion. Due to more shares outstanding, per-share earnings rose at a slower rate of 9.0%, to $2.92 from $2.68. That also beat the consensus estimate of $2.75.

Earnings from Royal’s retail banking division (48% of the total) rose 7.1% as higher interest income on its loans offset rising loan-loss provisions. Earnings at the capital markets business (30%) also rose 31.2% on higher trading volumes and underwriting fee income. As well, the wealth management division (18%) reported 7.0% better earnings due to higher assets under management. Earnings at Royal’s insurance division (4%) also rose 4.1%, as better returns from its investment portfolio offset higher claims.

For all of fiscal 2024, Royal will probably earn $11.34 a share, and the stock trades at an attractive 13.8 times that forecast.

Moreover, with the August 2024 payment, Royal raised your quarterly dividend by 2.9%. Investors now receive $1.42 a share instead of $1.38. The new annual rate of $5.68 yields 3.6%. The bank also announced a new plan to buy back about 2% of its outstanding common shares over the next year.

Recommendation in The Successful Investor: Royal Bank of Canada is a buy.

We hope you benefited from this analysis of Royal Bank of Canada. The bank is just one of the top-performing stock picks of our Successful Investor newsletter.

Of course, not all our picks over the years have produced these kind of spectacular gains. Some, in fact, have led to losses. But all portfolios need superstar stocks like this to offset those inevitable losses.

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This post was originally published in April 2023 and is regularly updated.