Why Royal Bank of Scotland Group plc, Rio Tinto plc And Diageo plc Forecasts Are Falling

Why are Royal Bank of Scotland Group plc (LON: RBS), Rio Tinto plc (LON: RIO) and Diageo plc (LON: DGE) falling out of favour?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The optimism that pushed the FTSE 100 up above 7,000 points a mere week ago seems to have evaporated, with the index of top UK stocks back as low as 6,780 as I write. The pessimism seems to be extending to individual companies too, with forecasts being cut back across the board.

Recovering bank

Royal Bank of Scotland (LSE: RBS)(NYSE: RBS.US) shares were doing nicely, but since 24 February the price has tumbled 14% to 341p, after 2014 full-year results failed to generate excitement. The bank finally recorded a profit, yet it’s still a long way from restarting its dividend payments — there’s a relatively meagre 0.5% yield forecast for this year with 2% penciled in for 2016, while rival Lloyds Banking Group looks set to provide 5.3% that year.

Those forecasts? Only a month ago the City’s experts were predicting EPS of 32.7p for 2015, and in the short time since that’s been pared back to just 29.1p. For 2016 we’ve seen something similar, with a 32.5p forecast cut to 28.7p.

It looks like pundits and investors alike might be arriving at the conclusion I did some time ago — RBS is overpriced compared to Lloyds, and is still more than a year behind in the recovery stakes.

Struggling miner

If you thought things could only get better for Rio Tinto (LSE: RIO)(NYSE: RIO.US), think again.

Weak commodities prices have taken their toll on Rio all year, but now we have the added pain of tumbling forecasts. In the past week alone, the EPS consensus for 2015 has been pruned from 233p to 220p, with the 2016 figure lowered from 292p to 265p. The share price has responded to the increasingly gloomy outlook with a 20% fall from August’s recent high, to 2,788p today.

But you know what? I reckon Rio Tinto is a steal now, with the shares dropping to a P/E of just 10.6 based on 2016 forecasts, and with dividend yields of 5.5% and 5.8% predicted for this year and next. And the analysts agree, with a big Buy consensus.

Drink up

You know something’s up when forecasts for drinks giant Diageo (LSE: DGE) are being slimmed down, and that’s what’s been happening. Over the past year, EPS estimates for 2015 have been slashed all the way from 111p, through 95p three months ago, to 91.3p today — and 2016 figures have dropped from 101p to 99p in just a month.

That would represent a further 4% EPS fall this year after a drop of 7% last, with only a modest 9% recovery on the cards for 2016. With dividends set to yield only around 3% and the shares on a P/E of about 20, I think Diageo shares are in the rare position of being overpriced right now.

Which is best?

There’s only one of these three I’d buy right now, and that’s Rio Tinto — it’s an easy winner from this selection.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »