New Purchase: Royal Bank of Canada Stock
September has historically been a bad month for the stock market, and this year was no exception. This is why I didn’t invest aggressively last month. However now that it’s October, I decided to get back into buying more equities. 🙂
So after looking through my watch list of different companies, I’ve decided to invest in shares of Royal Bank of Canada. 😀 I usually don’t keep disposable cash lying around so last week I borrowed $4,000 from my TD margin account and transferred the money into my TFSA to buy 55 Royal Bank shares (RY.TO) at $71.30 each.
I know purchasing about $4K worth of stocks with no money down sounds a bit risky, but I think I’ve made the right decision here. 😀 The stock pays me a 4.43% dividend yield, which happens to be more than the 4.25% interest I’m being charged for the margin loan. As long as I plan to hold the stock until my retirement and can service the cost of the loan, then I don’t see any downsides to financing this entire purchase with debt. 🙂
Royal Bank Stock Analysis
After doing some research and analysis on this company here are some reason why I chose to buy this stock.
- It can print currency. Due to fractional-reserve banking, all chartered banks can create new money through lending. This license to manipulate the money supply in the market has many unique advantages.
- Safety and stability. RBC is currently the largest company in the country, worth $106 billion by market capitalization. An economy of scale offers RY a competitive edge against smaller rivals. Even if Canadian banks run into solvency problems in the far future, the CMHC or other Crown corporations will probably step in to bail them out. In the U.S. the government’s TARP program in 2008 transferred $431 billion to struggling U.S. banks.
- Growing profits. Royal Bank continues to deliver earnings growth year after year. According to stock analysts the estimated earnings in 2017 will be around $7.35 per share, which would make RBC 19% more profitable than last year’s actual earnings.
- Attractive valuation, relative to historical averages. The P/E ratio is used to determine how much investors are willing to pay for a stock. A high ratio signals that buyers are willing to pay a premium for the shares. But lately the trailing P/E ratio of Royal Bank (Blue line below) is at the lowest it’s been in years! This P/E compression won’t last forever so right now looks like a good time to start accumulating a position.
- Growing dividends. According to its investor’s relations, RY has increased dividends by more than 400% since the year 2000. It increased dividends almost every year, except during the financial crisis period.
- Protection against rising interest rates. RBC holds about $463 billion in net loans. If it can charge even 0.25% more interest on average, then that’s an additional $1.16 billion of revenue every year, minus loan lost provisions. A rising interest rate environment benefits all banks. The more interest homeowners pay for their existing mortgages over the next 25 years, the more money Royal Bank can make from those loans. 🙂
- Potential split soon. The stock tends to split 2:1 when each share reaches around $80 to $90. The most recent split was in 2006, and then in 2000 before that. The share price is currently around $74 today. Stocks splits create more demand since each share becomes more affordable to own for new investors.
As a value investor, I think RBC is an attractive buy at its current price. And as a dividend growth investor, I can’t complain about its growing distributions. 😉 This is why I’m confident enough to put $4,000 into a stock using only other people’s money. I’m locking in my cost now, so I don’t have to pay more for it later. One potential risk for this stock is the possibility of a collapse in the housing market which could affect the bank’s earnings. But I currently see no signs of a real estate correction in the foreseeable future. 🙂
For more information about the stock, here’s a company overview presentation made by RBC.
Random Useless Fact:
In Russia there is a monument dedicated to all the lab rats that have died in the name of science.