Are Royal Bank of Canada's Fundamentals Too Stellar to Ignore?

Most U.S. investors rarely if ever think about buying shares of foreign companies. This tendency, called home country bias, is understandable as people prefer to park their money in familiar terrain. But it can be a mistake. Last year, Canadian stocks outperformed their U.S. counterparts by almost 2-to-1, as Prime Minister Mark Carney's plans to deregulate and reinvigorate Canada's economy resonated with investors.

But while Canada's equity benchmark, the S&P/TSX Composite, returned 29% in 2025, there were some notable outperformers. At the top of my list is Royal Bank of Canada (NYSE: RY), a $246 billion Toronto-based bank that's gained 46% during the past 12 months. With 34% of its 2024 revenue coming from wealth management, 30% from personal banking, 21% from capital markets, and 15% from commercial banking and insurance, the bank's business model is well diversified and offers geographic diversification for U.S. investors. Here's why this company's fundamentals are too stellar to ignore.

1. Operating margin is triple that of the S&P 500 average

Operating margin refers to the percentage of revenue that a company retains after operating expenses, from salaries to utility bills and overhead, are paid. It's useful for comparing profitability of companies across industries, and the average S&P 500 company has an operating margin of 13.2% as of January.

Royal Bank of Canada's operating margin is 44.8%, or more than triple that of the S&P 500 average. True, you can find some stars on the S&P 500 with higher operating margins (Nvidia's is 63.2%). But the market is well aware of this, and has already priced Nvidia higher accordingly. Royal Bank of Canada isn't attracting nearly as much attention from Wall Street, with 437 institutional firms increasing their stake in Royal Bank of Canada during the last filing period, compared to a whopping 2,744 for Nvidia.

2. Yield and earnings growth more than double the S&P 500 average

Last quarter, Royal Bank of Canada reported earnings growth of 29% year over year, more than double the S&P 500 average of 13%.

Meanwhile, the bank raised its dividend 6.5%, to 1.64 Canadian dollars ($1.30). The prospect of receiving dividends in Canadian dollars might give Americans pause, but analysts forecast the Canadian dollar strengthening against its U.S. counterpart in 2026, building on gains from 2025. With the Federal Reserve poised to lower interest rates, the Canadian dollar has more natural upside since rates in Canada are already low.

Royal Bank of Canada now pays a dividend of about 2.8%, more than double the S&P 500 average. It's also increased its dividend by 32% since 2021, handily outpacing the 19% inflation U.S. investors have seen in that time.

Image source: Getty Images.

3. Relative to the S&P 500, and in absolute terms, the bank is a bargain

Four years into this market rally, the S&P 500 carries an average price-to-earnings (P/E) ratio of 29.9, which is a 50% more than its historical average. By contrast, Royal Bank of Canada's P/E ratio stands at 17.

Despite its 46% rise in share price during the last year, this bank is still priced at a discount, both relative to the S&P 500 today and to the index's historical average P/E ratio of 19.9. Despite its strong performance, it's flown under the radar, keeping its low valuation, but perhaps not for long. In recent weeks, six analysts following the stock have raised their earnings forecasts, compared to just one reduction.

For investors looking for value, significant and increasing yield, diversification from U.S. markets, and security in a highly profitable stock, Royal Bank of Canada is a buy.

William Dahl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.