The following is a guest post from one of my favorite bloggers out there – Dividends4Life. Our investing approach is similar in that we both focus on dividend paying stocks. D4L’s analysis of dividend stocks is very well done and I encourage you to check his blog out.
I would like to thank The Dividend Guy for the opportunity of guest posting on his blog. I consider this an honor because this blog holds a special place in my life – it was the very first blog that I ever visited. Being a little older than the average blogger (mid-40’s), I always assumed that blogs were for teenagers and 20-somethings to discuss irrelevant topics. Was I ever wrong! I have found more good investing information and intelligent conversations on blogs like The Dividend Guy Blog than in all the main-stream media combined.
With that said, let’s move to today’s stock analysis. Since The Dividend Guy is Canadian, I thought it only appropriate for me to take a look at a Blue-Chip Canadian company, The Royal Bank of Canada (RY). To keep the international mix interesting, I will do the analysis based on the NYSE ADR.
Linked here is a PDF copy of my analysis of the Royal Bank of Canada (RY). Below are some highlights from the above linked analysis:
Company Description: Royal Bank of Canada (RBC) offers a range of banking and financial services in North America and internationally.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. RY is trading at a discount in 3 of the 4 valuations listed above – 1.) Avg. High Yield Price, 2.) 20-Year DCF Price and 3.) Avg. P/E Price. If I exclude the high and low valuation, and average the remaining two valuations, RY is trading at a 7.3% discount. RY gets a Star for being fairly valued.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. RY earned 2 of the 4 available Stars in this section – 1.) Rolling 4-yr Div. > 15% and 2.) Dividend Growth Rate. 1.) Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1998-2001, 1999-2002, 2000-2003, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. It was a home run for RY in this section earning both available Stars. RY’s NPV MMA Diff. was an eye-popping $199, 376. That means if the historical dividend growth rate were to continue into the future, the NPV of RY’s dividend income in excess of what could be earned on a 4.6% MMA over 20 years would be $199,376 per $1,000 invested.
Other: RY is a stock that I would likely have never discovered if it were my Canadian friends made as a result of blogging. The only blemish on RY’s quantitative analysis is a dividend drop in 1999 ($0.29 from $0.30). With an after-tax writedown of C$160 million in October related to subprime debt-backed securities, it appears that RY’s overall exposure to these risky assets is much less than the large U.S. banks.
Conclusion: RY earned one Star in the Fair Value section, two Stars in the Dividend Analytical Data section, and two Stars in the Dividend Income vs. MMA section for a total of five Stars, which rates it as a 5 Star-Strong Buy.
The historical DCF value for RY was based on an 18.4% EPS growth rate and a 20% dividend growth rate. These will likely be difficult to sustain over the next 20 years. Assuming a pro-rata relationship between the EPS growth rate and the dividend growth rate, the current share price of $51.75 could be justified with a 12.1% EPS growth rate and a 13.1% dividend growth rate. At that dividend growth rate the NPV MMA Diff. would still be a sporty $20,308.
In summary, I have been buying RY and will continue to buy until its fundamentals change.
Disclaimer: As always this is only my opinion and you should not rely on it. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I own shares of RY.
What are your thoughts on RY?
Again, I would like to thank The Dividend Guy for allowing me to guest post on his blog. If you are interested in dividend investing, I would like to invite you to visit my blog Dividends4Life. In addition to Stock Analyses like what was presented above, Dividends4Life focuses on all aspects of investing with an obvious bend toward dividend income investing.
Disclaimer: The Dividend Guy owns shares in Royal Bank
New Dividend Guy
Hi, DividendGuy and D4L, I just found your blog from google, and had spend couple hours reading through your recent posts. I do agree with most of your point and analysis. However, the following facts are not considered and is bothering me:
– US may be heading into a recession is not considered.
– Ski rocketing energy price
– Inflation problem worldwide
– First age group of baby boomers population are going to retire near 2016.
Moreover, a depression is not out of question if the energy crisis keeps going until it pops, combined with the subprime and baby bloomers problem. While it is nice and reassuring (yes, i invest for dividends too, although i’m quite new to the club) to see all the historical data dating all the way back to 18xx. A more suitable worse case analysis may be to do the analysis on 50-years historical data dating between 1927 and 1976. (I use 50 yrs because that is approximately the time span in which I will be actively investing)
I did some research on BNS dating back to 1900, the dividend distrubition rate has decreased for 13 consecutive years between 1931 and 1944. That may of course be a special example because the original yield was > 10%. However, 10% is high only relative to today standards. Hence, the same is as likely to happen again if a depression were to happen. Am I being too much of a dooms day thinker? Or is there a justification for NOT worrying about these external factors? Any comments would be much appreciated!!! Thanks!
NDG: If a recession happens, it happens. It will not materially alter my investing strategy. Energy prices at today’s level do not concern me. As far back as the early 70’s there have been fears we will run out of oil. Same with inflation. I have lived through double-digit inflation in the 70’s. I do not believe the baby boomers will affect the economy in a material adverse way. In fact, they are likely to cause investing opportunities.
Obviously, this is just my opinion since no one knows the future.
Dividend growth investor
Looking at past data on Yahoo finance, it seems to me that RY has managed to increased its annual dividends every year since 1995, even though the Canadian Dollar has dropped over the same period. It’s quarterly dividend though is not as constant probably due to the fluctuations in CAD/USD rate.
Once again, very professional analisys.
NDG: I am wondering where did you go to manage to pull such old data on BNS. I have inquired about getting data older than 10 years on some forums, but have had no luck. It would be great if you can post a source for some of your data.
Dividend Growth Investor: You are correct that it related to the C$ and US$ exchange rate. That’s why I mentioned it was done on the NYSE ADR. To your point, I should have been more clear. Thanks for pointing it out.
New Dividend Guy
It’s actually on BNS website =)
It should be the first search that comes up on google if you search with this string:
dividend history site:scotiabank.com
I am actually very amazed with the dividend growth for the (good) banks in the very long run. The Dividend can easily double in 5 years. If I assume that I never take my money out (which means I don’t get taxed on the capital gain), this is equivalent to a 100% gain in investment. May be I’m too young as an investor that this seems too good to be true. And the fact (as D4L said) that the banks are selling at 4% yield (2x%-3x% payout ratio),
Dividend growth investor
That’s ok, don’t worry about it. Seems like RY is a valid ticker symbol on both TSX and NYSE. Judging from the info below, the company doubled its dividend in 4 years from oct 2003 to april 2007..
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the pdf doesn’t want to open???? is a problem with the website?
Celtic Minerals Ltd. announced that Kevin Flaherty has resigned as Chief Executive Officer. This resignation was at the request of the special committee of the board of directors
Celtic is seeking more information regarding certain additional transactions. It is possible that further review will disclose other unauthorized transactions in respect of which the former CEO has been queried. The special committee is also reviewing further steps to be taken in respect of the unauthorized advances. Securities regulators are also reviewing these matters and the Corporation is cooperating fully in that regard.
“well, we all know theirs huge benefits to register a company in Cyprus, lol. My account pointed me to a few blogs on the net which i’m rather reluctant to check out as i’ve been so busy lately”
RY on the NYSE is NOT an ADR. All of the Canadian stocks listed in the US are the shares themselves, not ADRs.