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Royal Bank of Canada (USA) (RY): A Quest For Dividend Growth in the Canadian Banking Industry

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Today I’ll be reviewing Royal Bank of Canada (USA) (NYSE:RY) as part of my Great Canadian Banking Series. In this 10-part series, I examine the Canadian Banking Sector to identify good dividend growth candidates.

Side Note: Since the article is focusing on a Canadian sector I chose to show stock information from the Toronto Stock Exchange instead of the NYSE. Dollar amounts and stock information are in Canadian dollars.

10-year stock chart

The 10-year annual average return is 8.2%. If we include the dividend payments over the past ten fiscal years (total dividends paid of $20.73) then the total average annual return would be 10.7% with the average return from dividends representing 2.5%.

Revenue & earnings per share

Revenue per share for Royal Bank of Canada (USA) (NYSE:RY) has been declining since 2007, but we see a growing EPS from 2009 on. This would suggest that the company is getting more efficient. I like that EPS is growing, but I’d like to see revenue per share grow as well.

Dividends

Royal Bank of Canada (USA) (NYSE:RY) has increased its dividend for 2 consecutive years. Prior to this, the annual dividend was held at $2.00 for the three fiscal years from 2008 to 2010. The dividend streak leading up to the stalled dividend in 2008 was 14 years.

The quarterly dividend recorded in April of $0.63 (up from $0.60) was its most recent increase, but it’s been increasing the dividend twice a year for the past few years. The quarterly dividend recorded in October 2012 was increased from $0.57 to $0.60. The most recent annual dividend increase would be from $0.57 to $0.63 which is an increase of 10.5%.

In the chart you can see where dividend growth stalled from 2008-2010. The overall trend is good, and it looks like dividend growth has started to improve since the global financial crisis.

Dividend growth

As you can see from the table below Royal Bank of Canada (USA) (NYSE:RY) shows good 1 and 10-year average annual dividend growth rates, but leaves me wanting more with the other rates.

Estimated future dividend growth

Royal Bank of Canada (USA) (NYSE:RY) stated in its 2012 annual report that it is targeting a payout ratio of 40-50%. This is consistent with other banks like CIBC and Bank of Montreal, which have stated the same targets.

Analysts expect annual EPS growth to be 8.0% for the next five years. Accepting this EPS growth rate and using a payout ratio of 40-50% would result in dividend growth of 4.9% to 9.7%. The company’s most recent annual dividend increase of 10.5% leads me to think that future dividend growth will be at the higher end of this range, likely around 8%.

Competitive advantage & return on equity

Looking at the table below, it looks like Royal Bank’s ROE has been in-line with the industry average.

The Canadian banking industry is dominated by the big six banks. The big six are all very competitive, so while there are not a lot of big players in the Canadian market, it is still very competitive. Overall I would say that Royal Bank of Canada has a narrow economic moat.

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