The prospects for RBS (LSE: RBS) continue to be uncertain. The challenges posed by Brexit could cause investor sentiment to remain weak, while risks facing the world economy may do likewise.
Despite this, the stock could offer investment appeal over the long run. It has an improving financial outlook, with its dividend expected to increase over the next few years. And since it trades on a low valuation, it may offer impressive investing appeal relative to the FTSE 100.
Of course, it’s not the only stock which could be worth a closer look. Reporting on Monday was a small-cap share which could generate impressive investment performance, in my opinion.
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Improving prospects
The company in question is digital services and platforms provider Kainos (LSE: KNOS). It released a trading update for the period from 26 November to date that reflects strong momentum within its core markets. Its performance for the 2019 financial year is also expected to be ahead of previous guidance.
Notably, the company has been able to deliver strong growth in its Digital Services division, which is benefitting from high demand. Meanwhile, the Digital Platforms segment has also been able to see growth in line with previous expectations.
Looking ahead, Kainos is forecast to post a 27% rise in net profit in the current year, followed by further growth of 13% next year. Since the stock has a price-to-earnings growth (PEG) ratio of just 1.2, it appears to offer a margin of safety. As such, now could be a good time to buy ahead of what may prove to be a period of strong performance for the business.
Turnaround potential
As mentioned, RBS faces a number of risks which could hold back its share price performance in the near term. Brexit is yet to reach its conclusion and this could lead to investors pricing in a margin of safety for companies with exposure to the UK economy. Furthermore, risks facing the world economy from a rising US interest rate and a weakening trading relationship between the US and China may cause a continued shift towards risk aversion among investors.
However, the prospects for RBS continue to improve. Under its current management team, the business has been able to grow its bottom line, and further growth of 5% is expected in the current year. The end of PPI claims later this year could mean that the wider banking sector is under less pressure over the medium term. And with the stock trading on a price-to-earnings (P/E) ratio of 8.8, it appears to offer a margin of safety, versus a number of other FTSE 100 stocks.
Since RBS is expected to increase dividends this year so that it yields over 5%, it could become an increasingly appealing income share. With shareholder payouts due to be covered 2.2 times by profit, there could be scope for further dividend growth over the medium term.
