Over the past few months, the RBS (LSE: RBS) share price has taken off. Since the beginning of the year, the stock is up 19.1%, excluding dividends, compared to a performance of 11.2% for the FTSE 100 over the same time frame.
Unfortunately, this excellent performance doesn’t go back that far. The stock is still underperforming the index on a one, two, and five-year time horizons. The question is, could this be about to change?
Transformational year
As I have written before, I think 2019 could be a transformational year for the RBS share price. For the past decade, the group has been struggling to return to profitability, a struggle that hasn’t been helped by a series of lawsuits that have been levelled against the bank, due to its role in the financial crisis.
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The good news is, it now looks as if RBS has put the bulk of these issues behind it. Management reached an agreement with the US Department of Justice to settle the last major financial crisis-era lawsuit outstanding last year and, earlier this year, the bank reported its second straight year of profit since the 2008 state bailout. The group earned a profit of £1.6bn for 2018 on operating profits of £3.4bn.
These developments have allowed management to reinstate the company’s dividend. For the first time since the financial crisis, last year shareholders received a distribution amounting to 5.5p per share, giving a dividend yield of roughly 2.1%.
And the City is expecting more of the same in 2019. Analysts believe the bank will pay out 13.4 p to shareholders this year, giving a potential dividend yield of 5.2%.
At the same time, the City has pencilled in earnings per share of 27.1p for 2019 on a net profit of £3.3bn. And it looks as if the group is on track to meet this figure. At the end of last week, RBS reported £707m of attributable profit for the first quarter of 2019.
Undervalued
Despite RBS’s improving profitability, the stock still looks cheap. At the time of writing, shares in RBS are dealing at a price to tangible book value of just 0.8, around 30% below the financial sector industry average of 1.1.
While I think it’s reasonable to say the RBS share price deserved to trade at a discount to the rest of the sector during its recovery process, now that growth has returned, I would expect the shares to command a higher valuation.
That’s why I reckon now could be the time to buy the RBS share price. Fundamentally, the business is strong, earnings are growing, and management is returning a healthy amount of cash to investors. However, the share price doesn’t seem to reflect this growth.
I think it’s only going to be a matter of time before the market wakes up to the opportunity here. When it does, there could be substantial returns on the cards for investors who are willing to buy into this long term opportunity today. There’s also that 5.2% dividend yield on offer while you wait.
