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One day after announcing the largest domestic banking deal in Canadian history, Royal Bank of Canada RY-T is tweaking its dividend program to help build up its capital reserves.

The move gives RBC investors the opportunity to reinvest their dividends at a 2-per-cent discount to the price of the shares.

By creating an added incentive for investors to participate in the dividend reinvestment plan (DRIP), RBC expects to save about $2-billion in capital. That would help add a financial cushion in advance of the $13.5-billion acquisition of HSBC Bank Canada, which RBC announced on Tuesday.

With economic storm clouds gathering globally, RBC has another reason to take a cautious turn with its dividend program.

“A defensive move on the DRIP raises questions about downside risks,” Scotiabank analyst Meny Grauman wrote in a note.

“Although we continue to observe strong loan growth at RBC, and across the peer group so far this earnings season, and no signs of a credit spike, most investors still expect 2023 to be more economically challenging than 2022.”

RBC joins Bank of Montreal BMO-T and Toronto-Dominion Bank TD-T as a member of the Big Six offering discounted DRIPs. The common link is that all three have blockbuster acquisitions on the go. BMO paid $17.1-billion for California-based Bank of the West last December, and TD struck a US$13.4-billion deal to buy Tennessee-based First Horizon Corp. in February.

“It’s a relatively inexpensive way to get capital versus doing an equity issue where you have to pay all the banking fees,” said Ryan Bushell, president and portfolio manager at Newhaven Asset Management in Toronto.

The attraction for investors is clear – especially retail and do-it-yourself investors. DRIPs automate the reinvestment process, while a discount can be a nice little boost to returns. The downside is that you’re effectively forced to buy extra shares on the dividend date and roughly at whatever price the stock happens to be trading at the time.

Other Canadian large-cap companies with discounted DRIPs in place include TC Energy Corp. and Fortis Inc.

On Wednesday, RBC announced fourth-quarter financial results that were slightly ahead of analysts’ expectations. While a broad slowdown in deal flow across the Canadian market squeezed RBC’s investment banking results, loan and mortgage activity was robust.

But RBC is preparing for tougher times ahead, having set aside $381-million in provisions for credit losses in its fourth quarter, in addition to enhancing its DRIP and pausing share buybacks until the deal for HSBC Canada closes.

In a call with analysts on Wednesday, Dave McKay, RBC’s chief executive officer, cited geopolitical tensions emanating from the war in Ukraine, the emergence of a global manufacturing slowdown and the unknown impact of aggressive central bank tightening as reasons for being defensive with its capital.

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