The Razor’s Edge

2-Year Price History

Ockham’s Rating

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RY Revenue

As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company’s stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, RY the high and low end of the Price to Sales per share ratios are 1.90x and 1.30x respectively.

Notice that RY’s current Price to Sales per share ratio is 1.35x, which is quite a bit below what we consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $32.35, RY is 16% below where we would expect to see it. This will beneficially factor into our final analysis of RY as it is not often that this stock sinks to these levels.

RY Cash Earnings

Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. RY is below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from RY. For example, RY’s Cash Earnings ratio per share has fluctuated between 10.99 and 16.06 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where RY is with respect to prior business periods.

So what does a Cash Earnings ratio below the historical norm mean for RY? Generally, RY’s investors have paid slightly higher stock prices for this level of Cash Earnings, which bodes well as a return to historical norms is statistically likely. However, it is never a guarantee that history gives us proper direction, particularly in fluctuating market cycles. So by utilizing a long term view and incorporating other areas of analysis (like Sales, Dividends, and management analysis), each investor can gain a more complete view of RY. Remember, that the average Cash Earnings level for RY has been 13.52, so the current Cash Earnings level of 11.85 is a positive in our view, but by no means is it overwhelming.

RY Dividends

When determining a company’s future prospects for success, Ockham Research sees analysis of dividend payments as a key additional factor. Even though it isn’t imperative for RY to shell out a dividend in order to receive a positive rating, it can be helpful to further our analysis.

The estimated annual dividend for RY is $2.00 producing a current dividend yield of 6.18%. Much like our evaluation of Sales and Cash Earnings per share, we review dividend yields from RY against the historic high and low levels over all available dividend history. Because dividends are a decision made exclusively by management, we view a healthy and rising dividend as a sign of confidence and strength. The highest dividend yield from RY over previous years was 9.75% while the lowest dividend yield was 2.11%. Management at RY has encouraged us with a current dividend yield of 4.22% above the historical median.