3 Elite Canadian Banks For Dividends: Royal Bank Of Canada (Part 1 Of 3) by Dirk S. Leach, Sure Dividend

It is difficult to find safe investments with 3%+ dividend yields and solid growth prospects.

Many equities today are priced on the rich side of valuations resulting in lowered dividend yields.  Low interest rates have made bonds a poor value for income seeking investors.

The benefits of investing in high quality stocks with above average yields and good growth prospects – trading at fair or better prices – are well-known to long-term investors.

What if you could quickly identify an entire group of these stocks?  This article takes a look at one such group the market is overlooking:

The Canadian banking sector.

There are 3 large Canadian banks that rank as a ‘Buy’ using The 8 Rules of Dividend Investing.

This article gives an overview of the favorable investment prospects of the Canadian banking system.  It also analyzes 1 of the 3 highly ranked Canadian Banks in detail:  Royal Bank of Canada (RY).

Why Canadian Banks ?

With all the banking names in the United States, why focus on Canadian banks for potential investments?

The first considerations are stability and credit worthiness.

Moody’s Investors Services ranks Canada’s Banking System number 1 in the world for financial strength and safety. The World Economic Forum has dubbed Canada’s banking system best in the world for eight years running. During the 2009 global financial crisis no Canadian bank failed or required a bailout.

A quick review of the fraction of non-performing loans for the banks in the European Union (EU), the US, and for Canada tells us that Canada’s banking system is in better shape.

  • 5.6% of loans at EU banks are non-performing
  • ~3% of loans at United States banks are non-performing
  • 0.6% of loans at Canada banks are non-performing

Canadian banks have non-performing loans factor five times lower than in the US.

Canada’s banks typically pay a higher dividend than do their US counterparts and they have been doing so for a very long time.  For example, the Bank of Nova Scotia (BNS) has a flawless record of paying dividends every year since 1832.  Only the Bank of Montreal (BMO) can top that with a track record extending back to 1829.  Toronto Dominion Bank (TD) is not far behind having paid dividends since 1857.

Dividends are important to the Canadian investors and to the Canadian banks paying them.  I like that.

Finally, if you are going to invest outside of the US, there is some comfort in investing in Canadian equities.  While Canada is not the US, it is also not all that different in its business culture, laws, regulations, and values.

Narrowing the Field

I screened the 5 largest Canadian banks looking at 10 year compound annual growth rates for revenue, EBITDA, EPS, dividends paid, and the most recent dividend payout ratio.  The list includes the previously mentioned banks BMO, BNS, and TD as well as the Royal Bank of Canada (RY) and the Canadian Imperial Bank of Commerce (CM).  A summary of the basic screening data is provided below.

Royal Bank Of Canada

Source: Author

Based on this screening, I selected BNS, RY, and TD for further analysis.  BNS, RY, and TD have consistently grown revenue, EBITDA, EPS and dividends paid out to investors by solid margins compared to BMO and CM.

Canadian oil producers are in no better shape than those in the US.  I thought it prudent to look at the loan book exposure to crude oil production and production related companies.  This proved very enlightening as I found that TD had the lowest exposure at about 1%, RY also low at 1.6%, BNS rather high at about 10%.

BNS’s 10% exposure to the oil and gas industry has been a challenge for BNS over the last couple of quarters and last quarter BNS raised its loan loss reserves by 40% primarily to cover expected defaults in the oil and gas industry.  With BNS having taken a large reserve last quarter and the price of oil slowly on the rise over the last quarter, BNS appears to be well positioned to ride out this latest oil and gas downturn.

I plan to cover Royal Bank Of Canada  in detail in this article with the investment thesis for BNS and TD in future articles.

Royal Bank of Canada

RY is Canada’s largest bank by market capitalization at $92B in US dollars, the 6th largest in North America, and is ranked 18th globally.  RY has offices in Canada, the US and in 38 other countries with a total of 79,000 employees serving more than 16 million clients.

Over the last 10 years, Royal Bank Of Canada has managed to achieve healthy growth of its revenue, EPS, and dividend payments while maintaining a conservative dividend payout ratio.  These metrics are shown in the updated charts below.  Readers will note that the dip in EPS and the spike in the dividend payout ratio was due to the impact of the 2009 financial crisis.  Note that the bank quickly recovered its EPS.

Royal Bank Of Canada

Source:  GuruFocus

Royal Bank Of Canada  maintains a Common Equity Tier 1 of 10.1% well exceeding the Basel III accord requirement of 6% and carries an AA- credit rating from Standard and Poor’s.  RY’s cash flow remains strong and RY just recently raised its quarterly dividend to $0.81 CDN from $0.79 CDN continuing its history of rewarding its share holders.  As of Monday, February 29, RY’s annual dividend yield is a respectable 4.1%.

The reader should note that all of the above data is based on financials reported in US dollars and is therefore impacted by the exchange rate between the Canadian dollar and the US dollar.  As an example, the dividends per share chart above shows the annual dividend paid in US dollars at $2.47 based on the current exchange rate.  The annual dividend paid in Canadian dollars is $3.24 (latest quarter annualized).

This does have implications in understanding the charts above.  While the charts show that revenue, EPS and dividends have all turned and headed south over the last several quarters, that result is true only in US dollars due to the recent strength of the US dollar compared to the Canadian dollar.

The bottom line is that the reader needs to factor in the impact of the exchange rate to fully appreciate the charts above.  I was unable to find a comparable website to GuruFocus with data in Canadian currency but I’ve included a more complete discussion on exchange rate impacts and risks in the next section of this article.

This financial summary, while brief, indicates that RY is healthy and growing.

Is A Canadian Recession Likely?

Investments that are a “sure thing” seldom come along… I’ve yet to find one in 30+ years.

Investors should look at the possible risks of any potential investment.  There may be other risks I’ve not identified but the following paragraphs summarize the risks I’ve considered.

In 2015 Q1 Canada’s GDP contracted 0.2% and contracted again by 0.1% in Q2.  So, most economists would say Canada experienced a mild recession in 2015.

The GDP estimates for the third quarter are positive and the initial GDP readings for the

1, 23  - View Full Page