Valuation
Morningstar currently rates Royal Bank of Canada as a 3 star stock as it is currently priced close to its estimated fair value of $57. For Morningstar to rate Royal Bank of Canada as a 5 star undervalued stock the price would have to fall below $34.20. I calculated my own target price and came up with $50. To see the details of this calculation read the full analysis of Royal Bank of Canada.
My target price of $50 is 46% higher than Morningstar’s 5 star target. This is quite a difference, so I was worried that my target price wasn’t conservative enough. Looking at the past ten fiscal years worth of the highest dividend yield’s I think my target price is still conservative. The 5 star price would result in a dividend yield of 7.4%, and my target price a yield of 5.0%. A yield of 5.0% is still conservative compared to past dividend yields.
Morningstar’s 5 star price is very conservative, and it looks like the only opportunity to buy at a 7.37% yield would’ve been in 2009 in the height of the global financial crisis. Having looked at historic high dividend yields, I’m content to keep my target price at $50. You can see all of my target prices here.
Other investment options in the same industry
Royal Bank of Canada is one of six banks that make up the majority of the Canadian market. It shares the industry with The Bank of Nova Scotia (USA) (NYSE:BNS), Toronto-Dominion Bank (USA) (NYSE:TD), CIBC, Bank of Montreal, and National Bank.
All of the banks offer a dividend yield of around 4% or higher, which is enticing. They range between Toronto-Dominion Bank’s 3.67% to CIBC’s 4.91%. Their payout ratios are all reasonable with them ranging from National Bank’s 40.00% to Bank of Montreal’s 49.50%.
When it comes to dividend growth and estimated 5-year annual EPS growth CIBC and Bank of Montreal look a little lackluster compared to the other banks. I think National Bank, Bank of Nova Scotia and Toronto-Dominion Bank show the most promise. Royal Bank offers appealing fundamentals, but I prefer the other three banks just mentioned.
Bank of Nova Scotia has increased its dividend for 2 consecutive years, which doesn’t sound very impressive until you look at the bigger picture. It has increased its dividend in 42 of the last 45 years. This is very impressive. The most recent dividend increase happened with the dividend recorded in April, when management increased the quarterly dividend by 5.3% from $0.57 to $0.60.
Recently, management has been increasing the dividend twice a year, so the most recent annual dividend increase would be from $0.55 to $0.60, which is a 9.1% increase. The company’s most recent annual dividend increase of 9.1% leads me to think that future dividend growth will be around 8-10%.
Like most of the big six banks Toronto-Dominion Bank has increased its dividend twice in the past year. This led to an annual dividend increase of 12.5%. My guess is that future dividend growth will be at the higher end of my estimated range of 6.4-11.2%.
