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.
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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.
