With Royal Bank of Scotland (LSE: RBS) reporting a first-half rise in profitability on 30 July, the rumour mill is abuzz with claims that the government is squaring up to sell-off of some of its 81% shareholding. Most commentators suggest that Chancellor George Osborne has plans to start the process sometime in the next few weeks, with some even having claimed he’d try to place some shares with institutions as early as today.
With RBS lagging the FTSE 100 over the past 12 months, while rival banks have been beating it, is it a good time to buy RBS now, ahead of any renewed government sale? I’m not sure it is.
FTSE stagnating
At 6,698 points as I write, the UK’s top index stands at exactly the level it was 12 months ago (all bar a fraction of a percent), having being hit by fallout from the Greek tragedy of the past few months. Compared to that, RBS shares are down 3% in the same period — but Lloyds, the other bailed-out bank, has seen its shares rise 13% over the past year and Barclays has soared to a 29% gain.
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The problem was, as I wrote a year ago, RBS looked overvalued on its then-current fundamentals. It was at least a year behind Lloyds in getting back to earnings growth and resuming dividends, yet its shares were commanding a higher valuation. That could have been justified had there been strong earnings growth forecast for RBS for the next couple of years, but the City’s analysts were pretty cagey on that score.
Too expensive
A year on, and despite the price fall, I still think RBS shares are overpriced. There’s a P/E of 14.5 suggested for the year ending December 2016, but RBS is still only expected to be offering dividend yields of around 1% that year — and there’s a lot of uncertainty twixt now and then. And some of the pricing might well be due to relatively low liquidity — the government still owns 79% of the bank, while its stake in Lloyds is now down to 14%.
By comparison, forecasts for Lloyds suggest a P/E of only a little over 10, and that’s with forecast dividend yields approaching 5% — and there’s a pretty firm Buy consensus for Lloyds from the City, whereas RBS is rated a Sell.
Critics of the government’s mooted plans to sell off a tranch of RBS point to the fact that the shares were bought for around 500p apiece, and they’re currently changing hands for 341p. Selling now, they point out, would realise a loss for the taxpayer — better to wait at least until break-even point, surely.
A daft strategy
But from an investor’s stance, that’s a mug’s approach, as the value of an investment you hold today is entirely unrelated to the price you originally paid for it. Anyone planning to sell RBS today (like the Chancellor, allegedly) should base the decision only on today’s price and the prospects for future value.
On that score, I certainly wouldn’t be buying RBS shares today, and that 341p could be a decent price for taxpayers to get if they do end up being sold for us.
