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Why the RBS share price rose 12% in September

G A Chester — Thu, 03 Oct 2019 06:00:55 +0000

Royal Bank of Scotland (LSE: RBS) was the top performer of the five FTSE 100 banks in September. A 12% rise in its share price smashed the index’s gain of 3%.

In this article, I’ll discuss why its shares soared, and give my view on its current valuation and prospects.

Volatile

To begin with, it’s worth noting that RBS’s September performance followed a poor showing in August. Its shares slumped 15% that month, compared with a 5% drop for the FTSE 100, and it was the worst performer among the banks.

As August and September have shown, RBS tends to be more sensitive than its peers to changes in sentiment in the wider market. However, having acknowledged the share price is prone to volatility, let’s turn to the more concrete matter of company news.

PPI crescendo

The catalyst for RBS’s poor performance in August was its half-year results at the start of the month in which it revealed it’s “very unlikely” to achieve its 2020 financial targets “given current market conditions, continued economic and political uncertainty and the contraction of the yield curve.”

On the face of it, news in early September continued to be negative. RBS reported that the volume of PPI claims ahead of the 29 August deadline had been “significantly higher than expected,” and that it would be making an additional provision of between £600m and £900m.

Other banks made similar statements, but the market shrugged off the news across the sector. Maybe it was simply the end of the uncertainty of the long-running saga around PPI that kept share prices ticking up, or maybe market participants felt that many of the claims in the huge August spike would prove spurious, and that the banks had (for once) over-provisioned.

Analysts and Alison

The market also shrugged off several somewhat negative analyst releases on RBS over the first half of the month. The most severe came from Deutsche on 6 September. It downgraded the stock to ‘hold’ from ‘buy’, and slashed its price target to 215p from 290p.

RBS’s shares continued to march upwards, and on 20 September reached a month high of 213.5p (15% up from the end of August). This peak came on the day the company named its new chief executive as Alison Rose, almost five months after incumbent Ross McEwan announced his intention to depart. So, this was another outstanding uncertainty put to bed.

The share price eased back a little in the latter days of September, but still ended the month with the aforementioned healthy 12% gain at 207.6p.

Cyclical risk

It’s looking like October’s going to be another volatile month, ahead of the Brexit deadline, with the FTSE 100 plunging 3.2% yesterday — its biggest drop since before the Brexit vote — and RBS’s shares falling back below 200p.

However, I’m less concerned about sentiment and volatility than the risk that, whatever the Brexit outcome, we’re a lot nearer today than at any time in the last 10 years to the next cyclical downturn in the economy.

Personally, I don’t quite see a big enough margin of safety in RBS’s current share price to protect me against earnings and dividend forecasts evaporating in a recession scenario. As such, I’m content to avoid the stock at this stage.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Forget the RBS share price. I’d back this other blue-chip to smash the FTSE 100

G A Chester — Wed, 14 Aug 2019 14:26:44 +0000

When looking at individual UK blue-chip stocks, I thinking its always worth considering whether the company has good prospects of delivering a higher return than the FTSE 100 itself. After all, you’ve always got the option of investing in a cheap index tracker fund.

With this in mind, I believe Royal Bank of Scotland (LSE: RBS) is a stock to avoid, but rate insurer Prudential (LSE: PRU), which released its half-year results today, as a ‘buy’. Here, I’ll explain why exactly I have a negative view on RBS and a positive view on Prudential.

Pedestrian

It seems that just as RBS is getting back on its feet after 10 years of financial surgery, it’s set to be pummelled by a fresh wave of body blows. In its half-year results earlier this month, it advised that it’s now “very unlikely” to hits its 2020 targets of 50% cost:income ratio and 12% return on tangible equity. It said this is due to “current market conditions, continued economic and political uncertainty and the contraction of the yield curve.”

Since then, we’ve had government figures showing the UK economy contracted by 0.2% between April and June. This is the first quarterly contraction in seven years, and raises the spectre of the UK entering a recession — two successive quarters of negative growth — before Brexit’s even happened.

Banks are highly geared to the performance of the wider economy, and with RBS being domestically focused, a UK recession would hit it hard. Looking to the longer term, the UK is likely to be a lower-growth economy anyway. And with the FTSE 100 containing many geographically diversified businesses, with exposure to higher-growth markets around the world, I think RBS is poorly placed to deliver a higher long-term return than a simple FTSE 100 tracker.

Sure, a share price of 202p gives a low forward price-to-earnings (P/E) ratio of 7.4. But that’s what I’d expect for a highly cyclical business, with what I view as a tough near-term outlook and long-term prospects of only pedestrian growth.

Smashing

Prudential’s P/E isn’t quite as low as RBS’s, but in single-digits at 9.3 is still cheap by historical standards. Moreover, I think its plan to de-merge part of its business will unlock value for shareholders in the near term, while in the longer term, its geographical positioning makes it well placed to smash the return of the FTSE 100.

Prudential intends to de-merge its M&GPrudential business and list it on the London Stock Exchange as a separate company (M&G plc) in the fourth quarter of this year. After the split, existing investors will own shares in both firms. I rate the stock a buy today, because I think the valuation implied by the current share price of 1,460p, will move closer — after the separation — to a sum-of-the-parts valuation of 2,000p.

John Foley, chief executive of M&G, which is carried in Prudential’s results today as a discontinued operation, reckons M&G’s in “great shape to use the freedom of de-merger … to grow this business at scale.”

Meanwhile, Prudential will have valuable American operations and a fast-growing franchise in Asia, where there’s a terrific long-term growth story for its life insurance and other financial products. Indeed, the group today reported a 14% rise in operating profit in both the US and Asia. As such, I see considerably more long-term growth potential in Prudential than RBS.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The bad news keeps coming for Barclays and RBS! I’d rather buy this FTSE 100 dividend hero

Royston Wild — Mon, 29 Jul 2019 15:53:08 +0000

The wait’s almost over for Britain’s banks. Following years of claims and at the cost of tens of billions of pounds in financial penalties (some £35bn at the latest count), the claims deadline related to the mis-selling of payment protection insurance (PPI) is almost within touching distance.

Any bubbly that the banks may have been planning on breaking open on August 29 is likely to be put on ice though. Why? The possibility of more crushing expenses related to previous misconduct, that’s why.

I’m speaking more specifically about the European Commission’s decision on Monday to launch a £1bn lawsuit alleging that Barclays and RBS — along with JP Morgan, UBS, and Citibank — had engaged in rigging foreign exchange markets. The banking sector’s major players have already paid out a fortune in fines to global regulators over the issue of currency market manipulation, so today’s news gives investors in UK banks plenty more reason for worry.

Fresh Brexit bothers

Of course, the possibility of more expensive misconduct charges isn’t the only thing for RBS and Barclays to fear in the coming months. Indeed, the major reason to be fearful about these businesses is Brexit and the possibility of a no-deal, cliff-edge withdrawal from the European Union.

We’ve talked to death about the likely implications of a disorderly Brexit for the banks in recent weeks and months, so I won’t repeat them here. It’s worth bringing to your attention, though, the rapid shortening of odds on an economically-calamitous exit following Boris Johnson’s elevation to Prime Minister.

Indeed, sterling dived to fresh multi-year lows under $1.23 on Monday following news that the government’s intensifying no-deal preparations for a likely EU exit on October 31. Many commentators now believe leaving the European block without a deal is the prime goal of a Johnson administration, one which is also refusing to meet its Brussels counterparts for fresh talks unless the hated Northern Ireland backstop is removed.

Power up your dividend flows

It doesn’t matter, at least in my opinion, that both RBS and Barclays trade on cheap valuations with price-to-earnings (P/E) ratios of below 10 times. Such ratings reflect the huge risks created by an increasingly-murky trading outlook and the possibility of further whopping regulatory fines.

If you’re looking for great Footsie shares for right now, then National Grid (LSE: NG) is a much better bet, I believe.

We all know how the essential nature of their services makes utilities providers popular safe havens in turbulent times, so with Brexit concerns rising, worries over trade wars increasing, and political strife in the Middle East accelerating, it’s possible that investor interest in National Grid could grow in the weeks and months ahead.

It’s worth noting that fears over a potential re-nationalisation of the UK power grid under a Labour government have swirled around National Grid of late. The chances of such a scenario materialising are waning, however, as the poll ratings of Jeremy Corbyn’s party slide through the floor. Besides, if recent reports are to be believed, the Footsie firm is pulling out the stops to protect shareholders in the event of Labour coming to power.

Right now, National Grid sports a sub-15 times P/E ratio and a giant 5.7% corresponding dividend yield. I’d be much happier to invest my hard-earned cash here than in Britain’s beleaguered banks.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I think there’s never been a better time to buy these 3 FTSE 100 dividend stocks

Roland Head — Sun, 21 Jul 2019 15:13:32 +0000

The FTSE 100 offers investors a generous 4.3% dividend yield at the moment. But many individual companies offer much higher payouts.

It pays to be careful with very high dividend yields. But I think I’ve found a handful of FTSE 100 stocks that offer truly outstanding buying opportunities for patient investors.

Today, I want to look at three of these businesses, including two I’ve been buying myself.

Final chance?

I’ve been backing Royal Bank of Scotland Group (LSE: RBS) for a while now and own shares in the bank myself.

For many investors, RBS remains the bank they love to hate. This may have been fair five years ago. But I think the business today is more attractive than it has been for many years.

Departing chief executive Ross McEwan has fixed the bank’s legacy problems, made it profitable again and restarted dividend payments.

Today, the shares trade at a 20% discount to book value and offer a forecast dividend yield of 6.6%. I believe this valuation leaves plenty of room for further gains, if performance continues to improve.

A second opportunity may come when the government finally sells its stake in the bank. This should increase private investor confidence in the stock, as it would remove the risk of political interference.

Mr McEwan will be leaving for a new job in Australia over the coming months. But I believe UK investors have a great opportunity to benefit from his hard work at RBS. I rate the shares as a buy.

Time to be greedy

US billionaire Warren Buffett once famously advised investors to “be greedy when others are fearful”. Investors are certainly fearful of retail property landlords at the moment, such as FTSE 100 REIT British Land (LSE: BLND).

The fear is that even if new tenants are found to replace dying retailers, they will demand lower rents and shorter leases. Perhaps. But British Land has been in business for nearly 70 years and owns a mix of prime London office space and major shopping centres around the UK.

I think the quality and diversity of its portfolio, paired with good management, will mean a solution will be found to the changing needs of retail tenants.

In the meantime, the shares are trading at a 40% discount to their net asset value of 905p and offer a dividend yield of 5.9%.

I can’t predict where the bottom will be for the retail property market. But in my view, British Land is likely to offer good value and a decent income to investors buying at this level.

Power shifter

Gas and electricity network operator National Grid (LSE: NG) is what I’d call a slow burner. The shares are unlikely to double in the next few years. But the dividend has risen from 11.1p per share in 1997 to 47.3p per share today, without any disruption.

Shareholders aren’t completely dependent on the UK market either. The group now generates roughly half its profits in the USA, providing some welcome protection against the threat of nationalisation by a Labour government.

At about 830p, National Grid shares trade on 14 times forecast earnings and offer a dividend yield of 5.9%. I think this could be a good entrance point. If I didn’t already own shares in another utility, I would certainly consider adding this one to my income portfolio.

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Roland Head owns shares of British Land Co and Royal Bank of Scotland Group. The Motley Fool UK has recommended British Land Co. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The RBS share price: what’s next?

Roland Head — Mon, 20 May 2019 12:06:06 +0000

The Royal Bank of Scotland Group (LSE: RBS) has lagged the market over the last year, falling 23% compared to a 7% drop for the FTSE 100.

I think investors’ lack of love for the UK bank may have gone too far. Here, I’ll explain why I remain a buyer. I’ll also look at a major airline stock that’s currently out of favour.

The RBS 6% yield

It’s been a long while since Royal Bank of Scotland shares offered investors a 6% dividend yield. But the latest market forecasts suggest shareholders will receive a payout of 14.2p per share this year, giving a forecast yield of about 6.2%.

This dividend looks fairly safe to me. It should be covered 1.9 times by forecast earnings of 26.2p per share and backed by the bank’s strong balance sheet.

What else is good?

But its dividend isn’t the only attraction. In terms of valuation, the shares trade at a 22% discount to their net tangible asset value of 286p per share. That suggests a reasonable margin of safety, in my view.

Meanwhile, the bank’s profitability improved last year. Underlying return on tangible equity rising to 4.8%, compared to 2.2% one year earlier. Although this is still well below RBS’s medium-term target of 12%, I think it represents good progress.

Problems ahead?

Guidance for the year ahead is cautious. The bank expects an increase in bad debt levels and management remains concerned about the impact of Brexit uncertainty on the economy.

Another risk is that chief executive Ross McEwan has resigned. He remains in the post but the bank hasn’t yet appointed a replacement, so strategic progress could slow.

However, these risks are already known and understood by the market. In my view, the current share price represents a good long-term buying opportunity. I hold the shares and would be happy to buy more.

Too soon for this flyer?

Shares in Irish airline Ryanair Holdings (LSE: RYA) fell today after the budget flyer said full-year profits fell 29% to €1.02bn during the year to 31 March. Today’s figures contained a mix of good and bad news, in my opinion.

The good news was that by cutting fares, the airline is still able to fill seats despite adding capacity. More than 139m passengers flew Ryanair last year, a 7% increase from 130m in 2018. The airlines sold 96% of available seats, up from 95% in 2018.

The bad news is that Ryanair had to keep cutting ticket prices despite a sharp rise in costs. This suggests to me the airline doesn’t have much pricing power at the moment. This may mean there’s too much capacity on some short-haul European routes.

Is now the time to buy?

Ryanair’s cash generation remains strong and profits are expected to be flat this year. But this guidance depends on the firm managing to increase total revenue per passenger by 3%.

In the meantime, fuel costs are expected to climb by another €460m. Delivery of more fuel efficient Boeing 737-MAX aircraft has been postponed due to the grounding of this model.

Ryanair shares have fallen by more than 40% from their 2017 peak of about €18. They now trade on about 12 times forecast earnings. Although that seems reasonable, I suspect profits could have a little further to fall. I wouldn’t rush to buy. I think the shares could still get cheaper.

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Roland Head owns shares of Royal Bank of Scotland Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Does this news make the FTSE 100’s Royal Bank of Scotland a screaming ‘buy’?

Kevin Godbold — Tue, 30 Apr 2019 08:15:10 +0000

Last week, Royal Bank of Scotland Group (LSE: RBS) announced its chief executive Ross McEwan intends to retire. The firm also put out its first-quarter interim management statement. Should I buy some of the company’s shares on the news?

Plenty of change in the board room

Generally, I like change at the top in a company because new management can bring renewed ambition, drive and enthusiasm to the direction of an enterprise. And shareholders are certainly seeing change because the announcement comes hard on the heels of the appointment of new chief financial officer Katie Murray last December. RBS has lurched into a “worldwide” hunt for its next chief and McEwan will stay in post until the new executive is in place while working out his 12-month notice period.

But McEwan could be timing his departure well. In the recent management statement, the company said it expects ongoing Brexit uncertainty on the economy and associated delay in business borrowing decisions make income growth “more challenging” in the near term.

However, I’m uncertain about the bank’s prospects in the medium term, and in the longer-term too. The outfit is a highly cyclical operation – as are all the London-listed banks – and I reckon sustainable income growth is challenging at the best of times.

RBS has earned its low valuation

Erratic profits, cash flows, dividend payments and share prices are the normal way of things for the banks. When things are going well and profits have been riding high, we often see low-looking valuations. But there’s a good reason for that. I think the stock market is marking down the valuation in preparation for the next cyclical plunge, which could arrive at any time, or perhaps not for years. The uncertainty of it all is what keeps me away from bank shares such as RBS right now.

McEwan has been leading the company since October 2013, and this table shows the financial record over the period:

Year to December	2013	2014	2015	2016	2017	2018
Normalised earnings per share	(53.2)	20.5	15.2	(15.2)	19.9	25.5
Operating cash flow per share	(273.6)	(179.5)	7.97	(31.2)	324.6	(1.86)
Dividend per share	0	0	0	0	0	5.5p

Those erratic figures for cash flow and earnings look scary to me, especially those deep plunges into the negative. However, I think the dividend history tells the story of how hard the firm has struggled. The payment only reappeared in 2018, around a decade after the financial crisis.

Admittedly, City analysts predict further dividend increases ahead, but McEwan is going because he reportedly thinks the bank has turned around. That worries me because if the firm has returned to ‘normal’ it could be near to peak profits in the current macroeconomic cycle. And the thing about cycles is that troughs follow peaks and vice versa.

I don’t have the stomach to invest in RBS now despite its low-looking valuation. I reckon the valuation ‘anomaly’ could ‘correct’ by means of profits disappearing again down the line.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’d buy the RBS share price before its yield shoots up to 6.5%

Harvey Jones — Fri, 26 Apr 2019 09:53:45 +0000

Just when you thought the big FTSE 100 banks were finally escaping the fallout from the financial crisis, they have slipped into reverse.

Going backwards

Yesterday, it was the turn of Barclays to retreat, posting a 12% drop in first-quarter profits to £1.5bn. Its share price fell 2% as a result. Today, it is Royal Bank of Scotland Group (LSE: RBS), which has just issued a disappointing first-quarter date just one day after chief executive Ross McEwan surprised investors by announcing he was stepping down after five years.

RBS is down 3% after posting a 16.5% year-on-year drop in operating profit before tax to £1.01bn, down from £1.21bn in the first quarter of 2018.

The drop primarily reflects £265m lower income, partially offset by a £73m cut in operating expenses. Total income fell almost 8% from £3.3bn to £3.04bn. First-quarter profit attributable to shareholders fell to £707m, down 12.5% from £808m a year ago.

Margin call

Just like Barclays yesterday, RBS has posted a drop in net interest margins, from 2.14% to 2.07% (against 3.27% to 3.18% at Barclays), as the low interest rate environment continues to take its toll. Return on tangible equity also fell, from 9.4% to 8.3%.

There were some successes, with net loans to customers up £1.7bn compared to the final quarter of 2018, due to strong gross new mortgage lending and lower redemptions. That was a quarterly rise of 1.1%, or 3.2% year-on-year.

RBS said it remains on track to meet its £300m cost reduction target this year, achieving a £45m reduction in the quarter. Peter Stephens has a bullish view on the bank’s long-prospects.

Brexit again

Today’s report also contained the now mandatory reminder about ongoing Brexit uncertainty, which is delaying business borrowing decisions and “is likely to make income growth more challenging in the near term”.

Income in its NatWest Markets division fell more than 40% to £256m, while last year’s quarterly operating profit of £97m transformed into an operating loss of £62m.

Still, at least RBS is making a profit and £1.5bn in three months is not to be sneezed at, especially with Brexit casting a dull cloud over the domestic economy (while also being a handy scapegoat).

At least it’s cheap

The bank has come a long way, and still has a long road ahead of it. That is reflected in its temptingly low valuation of 8.8 times forecast earnings, and a price-to-book ratio of just 0.7.

Better still, the dividend is back. Today’s forecast yield of 1.4% is predicted to hit 5% this year, and 6.5% in 2020. That’s the real prize here. Who knows, we might even have a Brexit resolution by then, which would give the banking sector a real lift, but don’t hold your breath. A global recession could quickly slap it back down again.

Long-term play

Departing boss McEwan made RBS profitable in 2017, after nine consecutive loss-making years, and will be there for another 12 months while the bank finds a replacement. The Government still has a 62% stake, which shows that RBS remains damaged goods.

Some have suggested today’s report is softening investors for a profit warning later this year. That might be the time to buy.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This is what I’d do about the RBS share price right now

Roland Head — Mon, 18 Mar 2019 12:25:37 +0000

Over the last 10 years, Royal Bank of Scotland Group (LSE: RBS) has repeatedly disappointed investors hoping for a turnaround. However, I believe that patient shareholders may soon be rewarded.

The RBS share price has performed strongly this year and market sentiment is improving. In this piece I’ll explain why I’m holding onto my shares. Plus I’ll look at a fast-growing small-cap financial firm that’s just released some attractive numbers.

One big number

One remaining hurdle for RBS is that the UK government still owns 62% of the bank’s stock. This £20bn shareholding means that the government may have some influence over the bank’s activities and strategy.

Another concern is that we know the government wants to sell by 2024. This means there is a big ‘overhang’ of stock that will need to be sold into the market. If demand isn’t strong enough, this could depress the bank’s share price.

RBS is trying to address these concerns by offering to buy back some of the government’s shares. It’s gained shareholder approval to buy back up to 4.99% of its shares each year — about £1.6bn at current prices.

The timing of government share sales is uncertain, but I believe a buyback of this kind would be good news for shareholders.

Outlook is improving

RBS shares have risen by 26% so far in 2019, reversing the falls seen during the final quarter of last year. After a strong set of annual results in February, investors seem to be gaining confidence. Earnings forecasts for the current year have been rising and the stock’s discount to its book value is disappearing fast.

Last year’s results confirmed that the bank’s profitability is improving. RBS stock now trades on 9.5 times 2019 forecast earnings and offers a 4.6% yield. For long-term income investors, I believe this could be a good buying opportunity.

Dividends + growth from this small cap

Another financial stock I’m keen on is small-cap fund manager Miton Group (LSE: MGR). Shares in the firm are up by 13% at 59p at the time of writing after the group’s 2018 results came in significantly ahead of expectations.

Earnings for last year came in at 4.7p per share, nearly 15% ahead of analyst’s forecasts. The group’s 2018 dividend of 2p per share also beat forecasts for a payout of just 1.76p per share.

Cash inflows boost results

This specialist firm has a good track record of performance. At the end of 2018, 81% of its funds were in the top 50% of the market, in terms of their performance against rivals.

Customers appear to be keen to add more of their cash to the group’s funds. Net inflows rose to £1,019m in 2018, more than double the figure for 2017. This left the group’s total assets under management (AuM) up by £553m to £4,376m.

Although some of the firm’s funds were hit by the market sell-off at the end of last year, this was true across the market. In my view, it doesn’t detract from Miton’s strong track record.

I expect analysts’ forecasts for 2019 to be upgraded following today’s results. Although the group’s performance is dependent on wider market conditions, I see this as one of the best options in the fund management sector.

Miton shares now yield 3.4%, providing a useful income for patient shareholders. I remain a buyer.

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Roland Head owns shares of Miton Group and Royal Bank of Scotland Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Have £1k to invest? I think the RBS share price could crush the FTSE 100 this year

Roland Head — Sun, 17 Feb 2019 11:45:58 +0000

Shareholders in Royal Bank of Scotland Group (LSE: RBS) have needed patience as the bank has clawed its way back to profitability. But Friday’s results suggest to me that the waiting period may now be over.

In this article, I’ll explain why I think the shares are cheap at current levels, and why I expect them to beat the market over the next couple of years.

Dividend bigger than expected

Friday’s figures revealed that shareholders will get a much bigger payout than expected for 2018. The bank will pay a final dividend of 3.5p per share and a special dividend of 7.5p per share. Together with the 2018 interim dividend of 2p per share, this gives a total payout of 13p per share for 2018. That’s equivalent to a yield of 5.2% at the last-seen share price of 247p.

This generous payout was made possibly because the group’s pre-tax profit rose by 50% to £3,359m, slightly ahead of analysts’ forecasts. Although the group’s revenue only rose by 2% to £13.4bn, costs fell by £756m and bad debts of £398m were 19% lower than in 2017.

These changes combined to help increase the bank’s return on tangible equity — a key measure of profitability — from 2.2% to 4.8%. Although this is still too low, it’s a solid improvement and a step towards its 2020 target of at least 12%.

My target price is 325p

As a shareholder, I’m pleased with the progress made this year. But I’m hoping for more. At the heart of my valuation model is the assumption that this bank (and others) will be able to return to more sustainable levels of profitability.

The role model here is Lloyds Banking Group, which reported a return on tangible equity of 13% for the first nine months of 2018. RBS is obviously some way below this at the moment, but Lloyds’ performance suggests to me that the RBS target of “more than 12%” by 2020 may be achievable.

At the moment, RBS shares trade at a 15% discount to their tangible net asset value of 286p per share. In contrast, Lloyds’ shares trade at a 10% premium to tangible net asset value.

If RBS shares were valued at the same level as Lloyds’, my sums suggests the RBS share price could rise to about 325p. That’s about 30% above the current share price.

What happens next?

The government still has a 62.4% stake in RBS. The Treasury sold 7.7% of the bank’s shares last June but, since then, there’s been no word on the timing of any further sales. Some analysts have suggested today’s results — earlier than expected — may be a sign that the government is gearing up to sell more stock.

I’d welcome this but I don’t know how likely it is. What I do know is that RBS chief executive Ross McEwan seems to be doing all the right things. The only remaining concern is the possible impact of Brexit. McEwan sounded a cautious note on this on Friday, warning that bad debts could rise this year.

I don’t know what will happen next. But RBS shares offer a 2019 forecast dividend yield of 4.5%, and the bank’s performance is improving. I continue to rate the shares as a buy.

The post Have £1k to invest? I think the RBS share price could crush the FTSE 100 this year appeared first on The Twelfth Magpie.

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Roland Head owns shares of Royal Bank of Scotland Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The RBS share price keeps on climbing! Should you buy today or stay away?

Royston Wild — Mon, 28 Jan 2019 14:54:03 +0000

It’s a curious thing to see the Royal Bank of Scotland Group (LSE: RBS) share price tear away at the start of 2019.

The bank’s value has swelled 10% since the turn of January despite its profits outlook becoming even more cloudier in that time. Concerning Brexit, I remain unchanged in my belief that the possibility of a no-deal withdrawal transpiring is remote given the wrecking ball this would drive through the domestic economy.

But there’s no denying that the chances of this scenario are growing as the EU withdrawal date of March 29 draws closer and Westminster remains in a state of paralysis. This is something which the market seems not to be considering right now as it frantically snaps up RBS and its domestically-focussed peers.

As S&P Global Ratings worryingly predicted in recent days: “A no-deal Brexit could result in severe macroeconomic weakness, which would lead to rising personal and corporate UK insolvencies and weaker collateral values. In time, this would likely play through to banks’ asset quality and activity, undermining earnings and, possibly, capitalisation to a modest degree.”

Oof! More worrying data

Even if the UK does indeed swerve away from the cliff edge and avert a disorderly exit, the country remains on course for some form of Brexit. And as government analysis has shown, even the ‘softest’ of withdrawals would have a damaging effect on the national economy.

Times are already tough for the likes of RBS. Latest data from the Bank of England showed the rate of unsecured consumer lending rose 7.1% in November, down 30 basis points from the prior months, and representing the lowest pace of annualised growth for close to four years.

It’s no secret that Britain is living under a debt mountain, exacerbating this recent demand decline for credit services. According to the trade union TUC, households now owe on average a record £15,385, the body advising that “years of austerity and wage stagnation has pushed millions of families deep into the red.” This threatens to explode in the face of RBS and its peers as the economy rapidly cools.

6% yields? No thanks

An expected 2% earnings decline in 2019 leaves RBS dealing on a dirt-cheap forward P/E ratio of 8.8 times. Cheap, sure, but not cheap enough for me considering that this estimate, along with the predicted earnings rebound for next year, are in severe danger of being blown off course.

I’m also tempted to overlook the bank despite its podgy 5.3% dividend yield for this year and its 6.7% yield for 2020, too.

City analysts are expecting the Edinburgh-based bank to lift an anticipated 7.1p per share reward for 2018 to 12.8p this year, and to upgrade it again to 16.1p next year. I’m more than a little sceptical about these predicted dividends, though, owing to the toxic threat of slumping revenues, spiking impairments, increasing PPI-related penalties, and a weak balance sheet deteriorating further. There’s many, many more FTSE 100 dividend stocks I’d buy before even considering splashing the cash with RBS.

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