Monday, March 5, 2012

update for Royal Bank

Lets look at Royal Bank of Canada (RY) trades on both the TSX and NYSE.
For discussion and to determine the entry and exit points.
By using the historical P/E ratio one can determine what the entry and exit positions should be.
RY for the past 16 years has had an average P/E trading range of 16.12 (high) and 11.9 (low) after removing a couple of years due to non company earnings issues.
RY also has had some wild swings in the past, P/E value for example in 2009 RY had a high P/E ratio of 24.48 and a really low P/E ratio of 7.29 in 1996.
Update with RY’s earnings for the 1st quarter. My estimates have now been changed too suit.

First let me get past the dividend questions and ranges:
If your wondering about dividend growth? Yes RY has had growth in that area as well.
For the past 16 years (16 years average) RY has increased its dividends by more then 10 fold.

There is no indication that RY won’t continue to paying out more dividends going forward. In fact it is expected that RY will increase its dividend by 5.5% in 2012 to 2.20 per share. As expected RY has increased its dividend. !
RY has raised its dividend starting this quarter by 6% which is now .57 per quarter.
Looking at the level of support that the dividend can provide. Before the 6% increase people were willing to pay 69.58 (H) to 50.98(L). Now the Price support averages should be around 72.11 (H) and 52.83 (L).based on dividend stats*

RY has over that time have had an average annual Earnings growth of 19.74% . Knowing or at least estimating future earnings you can estimate the share price. In this case RY should earn about $5.36 in 2012 (we’ll change this amount to $3.87) and using the average P/E the estimated trading range should be 83.25 (high) and 65.93 (low). RY's future estimated range is now 60.01 (High) and 47.53 (low). RY at the moment is NOT a growth stock, it is possible that it’ll get back to a growth position in 2014
At todays price makes this stock looks like a hold/ low buy ! I'd be happier to buy it under to $54 The listed option trades are still valued are in the correct ranges.

Now on to how to trade, as I’m looking to purchase more shares of RY I’ll be writing a put at my price estimates in this case I’m looking to write a spread which is both the Call and a Put Option at $54 on the Montreal exchange . It would be best to sell the put for the shortest term as possible. So I’m looking to sell 10 March 2012 put contracts for 54 and collect the premium of .30 per share.
Since I own 2100 shares of RY at an average price of $56 per share I’m going to write a covered call as well in this case I’m going to split the position into 2 groups. So I’m going to write the April 56 calls for a premium of .85 cents and the October 58 at 1.65 per share.
If your wondering on what the return would be? For the next 17 days til the Puts expiry will net you .555% per share. 54000/300
For the two calls. The first batch is 10 April contracts at 56 for .85 per share. Works out to be 1.52% Plus any dividends. And the October 58 Contracts for 1.65 per share works out to be 2.95% plus dividends. For a Total collected today $2800.00

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