The RBS share price is rising. Is it time to buy?

As its recovery gains traction, is now the time to invest in Royal Bank of Scotland Group plc (LON:RBS)?

| 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 market proved to be way too optimistic, way too soon, about the recovery prospects for Royal Bank of Scotland (LSE: RBS) after the financial crisis. The shares were up to 576.5p by the end of August 2009 and hit a new post-crisis high of 580.5p the following April. They haven’t been anywhere near those levels in the long years since.

However, having traded as low as 148.9p in the aftermath of the Brexit vote, they’ve since climbed hand over fist to post terrific gains. Even with the banking sector wobbling somewhat on the current political uncertainty in Italy, the price is around 280p. Is this performance just the start of RBS’s comeback? Is it time to buy?

Cause for optimism

Shareholders attending the bank’s AGM in Edinburgh this afternoon certainly had cause for optimism. After nine year’s of losses, the company swung to a profit of £752m in 2017. And this year, in Q1 alone, it has booked £792m.

Other reasons for positivity include RBS’s continued progress on putting legacy issues behind it. Most notable was the recent announcement that the bank has agreed a $4.9bn settlement with the US Department of Justice to resolve its probe in relation to past subprime mortgage activity. This is the last major legacy legal case against RBS and the settlement is at the lower end of analysts’ expectations.

The City consensus is that the bank will now post underlying earnings per share (EPS) of 25p this year and pay a dividend of 7.55p (30% of EPS). At the current share price, the price-to-earnings (P/E) ratio is 11.2 and the prospective dividend yield is 2.7%.

Over-optimism

Analysts at Berenberg issued a particularly bullish note this week, reckoning RBS is ready to set a higher payout ratio and pay special dividends to boot. They forecast 15p this year, giving a yield of 5.4%, and 25p next year, which would increase the yield to 8.9%.

However, such payouts look unlikely to me. Chairman Howard Davies remarked at today’s AGM: “We have always said that any dividend payments will start small and grow incrementally. In my view, that remains the most sensible approach.”

Berenberg also reckons RBS could afford share buybacks of up to 15% of today’s market value. Possibly so, but I’m less sanguine than Berenberg about the potential depressive impact on the share price of the government’s sale of its 70% stake in the bank.

Cause for pessimism

Combinations of various factors, including government share sales, potential for a surge in PPI claims with still over a year to go to the deadline, Brexit uncertainty and a possible crisis in Europe, could result in various negative outcomes for RBS’s shares, ranging from no headway all the way to a crash.

A little bit of additional uncertainty has been added by the shock announcement this morning that chief financial officer Ewen Stevenson has resigned “to take up an opportunity elsewhere,” and that RBS appears to have had no succession plan in place. It said “the search for a successor will commence immediately.”

Undoubtedly, the bank has made great strides. However, in my view, the range of external factors that could negatively impact the company is not being sufficiently compensated for in the current valuation. As such, I’m avoiding the stock for the time being.

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.

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.

More on Investing Articles

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Down 78%, is this once-hot AI growth stock set to explode like the Rolls-Royce share price?

Our writer asks if he should invest in Super Micro Computer (NASDAQ:SMCI) following the growth stock's massive recent decline.

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »