It has truly been a crazy year when it comes to investing in Canadian stocks.
For the better part of 2020, the Canadian markets underperformed, primarily because of exposure to financials, and oil and gas.
There was still money to be made here (we outperformed the TSX Index significantly over at Stocktrades Premium in 2020), but for the most part the index struggled.
However, the situation is definitely changing, and one stock that could benefit is The Royal Bank of Canada (TSE:RY).
In fact, over the next 3-4 years, the company could thrive. Lets look at why.
What exactly does The Royal Bank of Canada (TSE:RY) do?
The Royal Bank of Canada is not only the largest bank in the country, but it is also the second largest company in the country period, 2nd to the tech giant, Shopify.
The company has operations primarily in Canada and the United States, but also exposure to 35+ other countries around the globe. It is because of this that the company was able to perform so well despite the global pandemic, but we’ll get to that later.
Royal Bank derives most of its income from commercial banking, wealth management services, insurance, corporate banking, and capital markets.
Market Cap: $160.39 billion
Forward P/E: 11.44
Dividend Growth Streak: 10 years
Payout Ratio (Earnings): 54.18%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 5.41%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
So, how did Royal Bank perform in 2020, and what is the forward catalyst?
Despite the global pandemic wreaking havoc on financial institutions around the world, Royal Bank posted record revenue of $47.10 billion through 2020.
Now, the company did post earnings per share that failed to grow over 2019, which by the way is the first time this has happened to the company since the financial crisis in 2008, but the dip in EPS wasn’t that extensive.
The company’s record year in terms of revenue can be attributed to a few things. For one, its capital market segment saw massive growth as new traders flooded into the market to take advantage of the fastest stock market crash in history.
More importantly, the company was able to maintain relatively stable operations because it had exposure to countries across the globe, ones that were being impacted and recovering from the pandemic at different rates, and different times.
For this reason, I’d argue that Royal Bank is one of the best financial institutions to own in the world.
However, there is going to be a key catalyst that I think will not only drives Royal Bank’s stock price higher, but its top and bottom line too.
Rumors of rising interest rates will benefit financial companies like Royal Bank
Royal Bank stock is, as of writing, touching all time highs. The primary catalyst for this is the fact that interest rates are rumored to be on the rise.
Interest rates rising for a company like Fortis or Telus is generally not a good thing. This is because these companies have high debt loads due to expensive infrastructure and capital costs.
However, a company like Royal Bank stands to benefit significantly if interest rates go up.
They loan money.
If interest rates go up, a company like Royal Bank can charge more for lines of credit, mortgages, and business loans. In the end, this makes them more money.
But, I really don’t think interest rates are going to rise. And, I still don’t see this being a problem for Royal Bank’s stock price.
I don’t think interest rates are going anywhere, unless inflation soars
Even though I think we’re going to be maintaining the current interest rates (at time of writing) until governments are comfortable with the pace and level of economic recovery, Canadian financial institutions like Royal Bank stand to benefit in terms of share price simply just off the rumors.
We can expect rumblings of interest rate increases for the foreseeable future, especially as the Canadian and U.S. Governments keep close tabs on the rate of inflation and the velocity of money being spent after businesses reopen.
As long as these rumors persist, I’d view them as a tailwind for Royal Bank stock, along with many other financial institutions here in Canada. And, if inflation rises to the point where rates do have to go up, this ultimately benefits the company as well. Speaking of rising figures, recent chatter about the price of oil increasing has people wondering which Canadian producer is best? We looked over Canadian Natural Resources (TSE:CNQ) as a contender.
There is a chance however, we see a short term pullback
As we’ve witnessed with high profile growth stocks and the correction over the last few weeks, too much of a good thing can ultimately lead to a pretty large swing in the other direction.
Now, Canadian banks, including Royal Bank, haven’t gone up as much as some high profile growth options. But, they are getting expensive. I did mention in the start of the article, Royal Bank stock is now reaching all time highs.
And, the company is also in overbought territory, as you can see by the chart above (the bottom blue chart). This is a technical indicator that essentially signals to investors that a stock’s price may have gone up “too much, too fast” and is due for a short term correction.
When a stocks RSI is above 70, it indicates it is overbought, while under 30 indicates oversold.
So, if you’re looking to add this Canadian financial giant to your portfolio, it might be best to average in. If there is a short term pullback, you’ll gain the benefit of getting your future portion for cheaper. And if it continues to run up in price, you’ll still benefit from purchasing some now.