Forget the RBS share price. I’d back this other blue-chip to smash the FTSE 100

G A Chester explains why he’s avoiding Royal Bank of Scotland Group plc (LON:RBS) but considering buying another FTSE 100 (INDEXFTSE:UKX) stock.

| 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.

When looking at individual UK blue-chip stocks, I thinking its always worth considering whether the company has good prospects of delivering a higher return than the FTSE 100 itself. After all, you’ve always got the option of investing in a cheap index tracker fund.

With this in mind, I believe Royal Bank of Scotland (LSE: RBS) is a stock to avoid, but rate insurer Prudential (LSE: PRU), which released its half-year results today, as a ‘buy’. Here, I’ll explain why exactly I have a negative view on RBS and a positive view on Prudential.

Pedestrian

It seems that just as RBS is getting back on its feet after 10 years of financial surgery, it’s set to be pummelled by a fresh wave of body blows. In its half-year results earlier this month, it advised that it’s now “very unlikely” to hits its 2020 targets of 50% cost:income ratio and 12% return on tangible equity. It said this is due to “current market conditions, continued economic and political uncertainty and the contraction of the yield curve.”

Since then, we’ve had government figures showing the UK economy contracted by 0.2% between April and June. This is the first quarterly contraction in seven years, and raises the spectre of the UK entering a recession — two successive quarters of negative growth —  before Brexit’s even happened.

Banks are highly geared to the performance of the wider economy, and with RBS being domestically focused, a UK recession would hit it hard. Looking to the longer term, the UK is likely to be a lower-growth economy anyway. And with the FTSE 100 containing many geographically diversified businesses, with exposure to higher-growth markets around the world, I think RBS is poorly placed to deliver a higher long-term return than a simple FTSE 100 tracker.

Sure, a share price of 202p gives a low forward price-to-earnings (P/E) ratio of 7.4. But that’s what I’d expect for a highly cyclical business, with what I view as a tough near-term outlook and long-term prospects of only pedestrian growth.

Smashing

Prudential’s P/E isn’t quite as low as RBS’s, but in single-digits at 9.3 is still cheap by historical standards. Moreover, I think its plan to de-merge part of its business will unlock value for shareholders in the near term, while in the longer term, its geographical positioning makes it well placed to smash the return of the FTSE 100.

Prudential intends to de-merge its M&GPrudential business and list it on the London Stock Exchange as a separate company (M&G plc) in the fourth quarter of this year. After the split, existing investors will own shares in both firms. I rate the stock a buy today, because I think the valuation implied by the current share price of 1,460p, will move closer — after the separation — to a sum-of-the-parts valuation of 2,000p.

John Foley, chief executive of M&G, which is carried in Prudential’s results today as a discontinued operation, reckons M&G’s in “great shape to use the freedom of de-merger … to grow this business at scale.”

Meanwhile, Prudential will have valuable American operations and a fast-growing franchise in Asia, where there’s a terrific long-term growth story for its life insurance and other financial products. Indeed, the group today reported a 14% rise in operating profit in both the US and Asia. As such, I see considerably more long-term growth potential in Prudential than RBS.

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 recommended Prudential. 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

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »