Another New Position Paying Me A 5% Dividend

This week I bought my first 16 shares of Royal Bank of Canada (RY). I already own The Bank of Nova Scotia (BNS) in my portfolio but was eager to add another large Canadian bank, because of their track record that goes back for more than 100 years. Royal Bank of Canada (RY) and Toronto-Dominion Bank (TD) have been on my buy list for a very long time. I’m more than happy that I finally pulled the trigger. 

RY is one of North America’s leading diversified financial services companies, providing personal and commercial banking, wealth management, insurance, investor services, and capital markets products and services on a global basis. This bank is the market leader across all key businesses in Canada. RY has more than 80,000 employees who serve more than 16 million personal, business, public sector, and institutional clients through offices in Canada, the United States, and more than 37 other countries. They are well diversified, from businesses and geographies to client segments. Founded in 1864, RY is the 11th largest bank worldwide and the 5th in North America, as measured by market capitalization.

Valuation

I hit the BUY button when the stock traded for a price of $60.19. This is equal to a P/E of 9 whereas the normal P/E ratio is just shy of 13. I think this is really a great deal. The price has made a swing back to the low 50’s in March and has already recovered with a nice 20%. At that time I bought other stocks on my buy list. At a price of $60, this still is a great opportunity. Look at the black line (price) in the FastGraphs picture below and how it always comes back to the blue line (normal P/E): regression to the mean. I’m confident I’ll eventually profit from Mr. Market’s manic depressive nature.

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Dividends

Every year since 1870, RY has been paying dividends. That’s 150 years, folks. Let that number sink in. It is a clear evidence of a strong and durable competitive advantage. In twenty years their quarterly dividend has gone up from $0.11 a share to more or less $0.80. Their dividend growth rate over twenty years is 12%. Over a period of three years their dividend growth rate is just above 3%. With a current quarterly dividend of $0.80 per share, this means my initial dividend yield is 5.10%. What a starter! The dividend in dollars depends on the USD/CAD rate. So the exact payment in dollars varies from quarter to quarter.

Payout Ratio

The increase in dividends is even more phenomenal given the fact that their payout ratio has only increased from 40% to 46% according to FastGraphs as you can see below. This percentage is right in the middle of their annual earnings which indicates they can withstand a large drop in earnings. I like that idea. During the last three years their payout ratio even dropped from 50% to 46%.

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Their goals for the future are in line with the historic records of RY. Their projected payout ratio has an upper limit of 50% according to their most recent investor presentation. I think this indicates that dividend increases during the handling and economic consequences of the coronacrisis will be in the low single digits. If RY stops increasing or even cuts its dividend during this COVID-19 pandemonium or aftermath, I’m okay with that. Because they’ll eventually come back stronger. I’ll buy even more shares of this company when their share price drops if they would announce a dividend suspense. So it’s possible this transaction requires patience and discipline to play out. But I think the scenario of a large dividend cut isn’t very likely.

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Credit Rating

RY is well-capitalized with a capital position way higher than required. RY has a common equity tier 1 (CET1) ratio, the measure of a bank’s capital strength, of 12% of risk-weighted assets (RWA). According to Basel III capital and liquidity rules, all banks must have a minimum CET1 to RWA ratio of 4.50% by 2019. This gives me confidence this 156-year old firm can resist the coronacrisis. RY have a high credit rating, also in comparison with their competitors.

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First Quarter Results

Their Q1 2020 results were in line with all growth figures mentioned before. Income numbers are up, ROE is extremely high and their CET1 ratio remains rock solid.

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We have to wait and see for the numbers of the second quarter as that quarter will contain the numbers of the paralyzed economic activities. Exactly how deep and long this downturn might be, is hard to see at this stage. Meanwhile I get paid a 5% dividend while my bank pays me a generous 0.02% on my savings account.

Did you buy a large Canadian bank lately?

Happy investing!