Is it a good company at a reasonable price? I do think that this is a good bank to invest in. Although you have to wonder if profits will be as good as this bank expands into the USA. US banks have not done as well as Canadian banks in the past and their share prices have been more volatile. The current stock price could be high. Analysts seem also to think so because of the lower return expected over the next year.
I own this stock of Royal Bank of Canada (TSX-RY, NYSE-RY). At the time I bought this stock it was on Mike Higgs' list of Canadian Dividend Growth Stocks and on the dividend lists I followed as were all the banks. I bought this stock in 1995, some 27 years ago. My total return to December 31, 2021 is 17.34% per year with 11.78% from capital gains and 5.56% from dividends.
I have a 66% dividend yield on my original investment bought 27 years ago in 1995. This is just one way of looking at an investment. If you buy this stock today and keep it for 10 years and dividend increases as it has done in the past 5 years at 6.60% per year, then in 10 years you could be getting a dividend yield of 6.51%. See chart below.
| Div Yd | Years | At IRR | Div Inc |
|---|---|---|---|
| 4.73% | 5 | 6.60% | 37.65% |
| 6.51% | 10 | 6.60% | 89.47% |
| 8.97% | 15 | 6.60% | 160.80% |
When I was updating my spreadsheet, I noticed that this time last year, analysts expect this bank to have revenue of $45,560M and EPS of $8.61 for 2021. These both came in much better with Revenue at $49,579 and EPS of $11.10.
For this stock, if you had paid $1,000 to buy shares in December 1988, you would have received 211.86 shares. These shares, after 33 years would be worth $28,445.55 and you would have received $11,290.55 in dividends. The total amount you would have received is $39,734.10.
The dividend yields are moderate with dividend growth low. The current dividend yield is moderate (2% to 4% ranges) at 3.44%. The 5, 10 and historical dividend yields are also moderate at 3.82%, 3.93% and 3.95%. The dividends increases are current low (under 8%) with dividend increases over the past 5 years at 6.6% per year. The last dividend increase was in 2021 and it was for 11%. Generally, in the past, this bank has raised the dividend twice within a financial year. However, there were no increases in the 2021 financial year.
The Dividend Payout Ratios (DPR) are fine. The DPR for EPS for 2021 was 39% with 5 year coverage at 45%. The DPR for Cash Flow per Share for 2021 was 32% with 5 year coverage at 39%. The DPR for Free Cash Flow for 2021 was 11% with 5 year coverage also at 11%. However, there is a big disagreement between sites on what the FCF is. However, under both values, the DPR seems fine.
Debt Ratios are fine. Because this is a bank, I am looking at Debt/Covering Assets Ratio for 2021, which is 0.73 and it is a good one. The Liquidity Ratio I calculate is 7.98, but this ratio is not important for banks. The Debt Ratio is 1.06. For this, any value at 1.04 or higher is fine, although this ratio has been higher on banks since 2008.
The Total Return per year is shown below for years of 5 to 38 to the end of 2021. Under the Capital Gain column is the portion of the Total Return attributable to capital gains. Under the Dividend column is the portion of the Total Return attributable to dividends. See chart below.
| From | Years | Div. Gth | Tot Ret | Cap Gain | Div. |
|---|---|---|---|---|---|
| 2016 | 5 | 6.60% | 11.81% | 8.12% | 3.70% |
| 2011 | 10 | 7.46% | 14.09% | 9.95% | 4.14% |
| 2006 | 15 | 6.90% | 9.34% | 6.07% | 3.27% |
| 2001 | 20 | 9.51% | 12.51% | 8.68% | 3.83% |
| 1996 | 25 | 10.57% | 14.44% | 10.22% | 4.22% |
| 1991 | 30 | 9.71% | 14.66% | 10.47% | 4.19% |
| 1986 | 35 | 8.70% | 15.11% | 10.54% | 4.56% |
| 1983 | 38 | 8.01% | 13.40% | 9.48% | 3.92% |
The 5 year low, median, and high median Price/Earnings per Share Ratios are 10.31, 11.61, and 12.92. The corresponding 10 year ratios are 10.15, 11.39 and 12.57. The corresponding historical ratios are 10.05, 11.61 and 13.51. The current P/E ratio is 12.58 based on a stock price of $139.60 and EPS estimate for 2022 of $11.10. The current ratio is just above the high of the 10 year median ratio. This stock price testing suggests that the stock price is relatively reasonable but at the top of the range.
I get a Graham Price of $127.63. The 10 year low, median, and high median Price/Graham Price Ratios are 0.88, 0.98 and 1.09. The current ratio is 1.09 based on a stock price of $139.60. The current ratio is at the high of the 10 year median ratio. This stock price testing suggests that the stock price is relatively reasonable but at the top of the range.
I get a 10 year median Price/Book Value per Share Ratio of 1.91. The current P/B Ratio is 2.14 based on a Book Value of $98,600, Book Value per Share of $65.22 and a stock price of $139.60. The current ratio is 12% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively reasonable but above the median.
I get a 10 year median Price/Book Value per Share Ratio of 1.91. The current P/B Ratio also could be 2.02 based on a stock price of $139.60, Book Value per Share estimate for 2022 of $69.10 and Book Value of $98,480M. The current ratio is 6% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively reasonable but above the median.
I get a 10 year median Price/Cash Flow per Share Ratio of 4.37. The current P/CF Ratio is 3.26 based on Cash Flow for the last 12 months of $61,044M, Cash Flow per Share of $42.83 and a stock price of $139.60. The current ratio is 25% below the 10 year median ratio. This stock price testing suggests that the stock price is relatively cheap.
I get an historical median dividend yield of 3.95%. The current dividend yield is 3.44% based on dividends of $4.80 and a stock price of $139.60. The current dividend yield is 13% below the historical median dividend yield. This stock price testing suggests that the stock price is relatively reasonable but above the median.
I get a 10 year median dividend yield of 3.93%. The current dividend yield is 3.44% based on dividends of $4.80 and a stock price of $139.60. The current dividend yield is 13% below the historical median dividend yield. This stock price testing suggests that the stock price is relatively reasonable but above the median.
The 10 year median Price/Sales (Revenue) Ratio is 3.12. The current P/S Ratio is 4.01 based on a stock price of $139.60, Revenue estimate for 2022 of $49,578M and Revenue per Share of $34.79. The current ratio is 29% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
Results of stock price testing is that the stock price is? First of all, it is not cheap. It might be reasonable based on the dividend yield tests, but the P/S Ratio test does not confirm this and says the stock price is expensive.
I look at the total return over a number of years. For P/S Ratio and P/E Ratio, the lower the ratio the cheaper the stock. For yield, the higher the yield, the cheaper the stock. In the chart below, you can see that beginning P/E Ratios are above and below the current one for good returns. For the best returns, they are below the current ratio. The current P/S Ratio is higher than all the other beginning P/S Ratios. The dividend yield is still below some past good returns.
In the following chart the capital gains for the 10 years to December 31, 2021 is 9.95% per year. The beginning yield was at 4.28%, and the P/E Ratio and the P/S Ratio were at 16.29 and 2.87. Does this chart change my opinion of the stock price? Not really as the current P/S Ratio is higher than all the others on the chart. This could be pointing to a rather high current stock price.
| # Years | Cap Gains | Beg P/E | Beg P/S | Beg Yield |
|---|---|---|---|---|
| 5 | 8.12% | 13.40 | 2.89 | 3.82% |
| 10 | 9.95% | 16.29 | 2.79 | 4.28% |
| 15 | 6.07% | 15.46 | 2.87 | 2.70% |
| 20 | 8.68% | 14.44 | 1.99 | 2.95% |
| 25 | 10.22% | 11.53 | 1.46 | 3.02% |
| 30 | 10.47% | 9.27 | 1.23 | 4.30% |
| 35 | 10.54% | 8.74 | 0.91 | 6.01% |
| 38 | 13.40% | 11.47 | 1.09 | 6.30% |
| current | 12.58 | 3.74 | 3.44% |
When I look at analysts’ recommendations, I find Strong Buy (5), Buy (6), Hold (3) and Underperform (1). The consensus would be a Buy. The 12 month stock price consensus is $144.63. This implies a total return of 7.04% with 3.60% from capital gains and 3.44% from dividends. The rather low return expected matches with the rather high current P/S Ratio.
Some analysts think on Stock Chase that you should buy but others worry about the economy and the beginning of a tightening cycle (that is increasing interest rates). Vishesh Raisinghani on Motley Fool thinks that every though it has had a good bull run in 2021, it is still a relatively attractive buy. Andrew Button on Motley Fool thinks this bank is cheap and will post solid growth. The bank talks about their fourth quarterly results on Newswire. A Simply Wall Street report on Yahoo Finance talks about payout ratios. The problem I see is that there is a big difference in what sites determine is FCF. You wonder how you can trust any FCF calculation when there are such differences.
Royal Bank of Canada is one of the two largest banks in Canada. It is a diversified financial services company, offering personal and commercial banking, wealth-management services, insurance, corporate banking, and capital markets services. The bank is concentrated in Canada, with additional operations in the U.S. and other countries. Its web site is here Royal Bank of Canada.
The last stock I wrote about was about was Bank of Montreal (TSX-BMO, NYSE-BMO) ... learn more. The next stock I will write about will be Rogers Sugar Inc (TSX-RSI, OTC-RSGUF) ... learn more on Monday, January 10, 2022 around 5 pm.
This blog is meant for educational purposes only and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.
See my website for stocks followed and investment notes. I have three blogs. The first talks only about specific stocks and is called Investment Talk. The second one contains information on mostly investing and is called Investing Economics Mostly. My last blog is for my book reviews and it is called Non-Fiction Mostly. Follow me on Twitter or StockTwits. I am on Instagram. Or you can just Google #walktoronto spbrunner8166 to see my pictures.
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