Why the RBS share price could be a bargain after dividend news

Roland Head takes a closer look at the latest numbers from 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.

Royal Bank of Scotland Group (LSE: RBS) will pay a dividend in 2018 for the first time since the financial crisis. Shareholders will receive an interim dividend of 2p per share, once the timing of the bank’s $4.9bn settlement with the US Department of Justice has been finalised.

The bank announced its dividend plans today alongside a solid set of half-year results.

Broker forecasts suggest the stock’s dividend yield could now reach 5% in 2019. After looking over the figures this morning, I’m convinced that RBS could be one of the best dividend buys in the FTSE 100 today. Here’s why.

Lifting the load

Today’s figures show that the group’s operating profit fell by 6.4% to £1,826m during the first half. But this profit figure included an £801m charge for litigation and misconduct issues. That’s double the £396m charge reported during the same period last year.

These costs relate to PPI compensation and to the bank’s legacy issues from the period around the financial crisis. They’ve been a drag on profits, but should mostly be resolved by next year. This should lift the group’s earnings, even without any improvement in operating performance.

The good news is that the bank’s management isn’t resting on its laurels. RBS’s performance has improved significantly since last year.

More profitable banking

Excluding litigation and misconduct charges, I calculate that the bank generated an underlying operating profit of £2,627m during the first half. That’s 12% higher than during the same period last year.

I believe the bank’s underlying profit margins are also rising. My calculations suggest that the bank’s return on tangible equity would have risen from 6.8% in H1 2017 to 7.7% in H1 2018, excluding litigation and misconduct costs.

Dividend = more buyers

After June’s £2.5bn share sale, the government owns 62.4% of RBS. But selling off these remaining shares should be much easier from now on.

Many City fund managers are only able to buy big-cap stocks which pay dividends. Some have also been avoiding the bank because of its previously unresolved legacy issues. So RBS has been off the buy list for many funds since 2009.

Now that chief executive Ross McEwan has fixed these problems, I expect to see a wider range of fund managers buying the shares. This should make it easier for the government to continue selling its stock without depressing the share price.

Too cheap to ignore

I already own a slice of RBS stock, but after today’s results I’m thinking about buying more.

Although operational improvements are still needed to cut costs and improve returns, this should get easier now that legacy problems have been resolved.

The shares currently trade on a forecast price/earnings ratio of 10, and at a 10% discount to their tangible book value. In my view this cautious valuation should provide decent upside if performance improves.

In the meantime, shareholders should be able to look forward to a forecast dividend yield of 2.7% in 2018, rising to an expected yield of 5% in 2019. RBS remains firmly on my buy list.

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.

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.

More on Investing Articles

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »

Yellow number one sitting on blue background
Investing For Beginners

My number 1 tip for Stocks and Shares ISA investors

This strategy has improved Edward Sheldon’s ISA returns dramatically and he thinks it could help other investors have more financial…

Read more »

White female supervisor working at an oil rig
Investing Articles

Down 20% in a year, is the BP share price simply too cheap to ignore?

After sliding for months, is the BP share price as low as it'll go? Even with the risk of more…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

4,123 shares of this UK dividend stock could get me £206 a month in passive income

Despite cutting its dividend significantly over the past five years, I think this FTSE 100 stock could be a good…

Read more »

Investing Articles

3 champion investments to beat the stock market in 2025

Looking for alpha? Dr James Fox details three investments that look destined to outperform the stock market in 2025 and…

Read more »

Investing Articles

2025 stock market recovery: a once-in-a-decade chance to get rich?

Zaven Boyrazian explains how he'd use the ongoing stock market recovery to his advantage, creating long-term wealth.

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

£20,000 in an ISA? Here’s how I’d aim to make £1,250 a month in passive income

Our writer thinks one rare FTSE 100 stock could help drive an ISA portfolio higher, resulting in a sizeable passive…

Read more »