Today’s results from RBS (LSE: RBS) may appear to be disappointing as the part-nationalised bank reported a £1bn loss for the first quarter of the year. Its Swiss subsidiary is being investigated and it’s having difficulty in spinning-off the Williams & Glynn division.
However, the quarterly loss of £1bn was largely a result of a £226m charge from the sale of a shipping portfolio as well as a £1.2bn payment made to the government to release RBS from a key part of its £45bn bailout. Without such items, RBS made a profit of over £400m in the first quarter of the year and this bodes well for its long-term dividend outlook.
Yes, RBS is expected to yield just 0.1% in 2016, but with dividends forecast to rapidly increase next year, it’s due to yield around 2.7% in 2017. And RBS’s bottom line is expected to increase by 26% next year on an adjusted basis, which shows that as it gradually moves on from legacy issues, its capacity to pay dividends should increase. As such, and while it may not appear so at the present time, RBS could become a strong income play.
Short-term softening demand
Also reporting today was British Airways owner IAG (LSE: IAG). Its shares have fallen around 3% in response to softening demand from passengers following the Brussels terrorist attacks. Due to this, IAG will moderate its short-term capacity expansion plans, but it continues to offer excellent long-term growth prospects and with its shares on a price-to-earnings-growth (PEG) ratio of just 0.5, they seem to offer growth at an excellent price.
With IAG yielding 4% at the present time, it appears to be a strong income play. However, in the coming years it could prove to be a top-notch dividend stock, since dividends currently account for just 24% of profit. Therefore, dividends could rise at a much faster pace than profitability over the medium term, which when combined with a relatively high yield means that IAG’s income prospects are very bright.
Growth potential
Meanwhile, Tesco’s (LSE: TSCO) dividend prospects are also hugely encouraging. That’s largely because of the company’s current strategy which is seeing it focus on its core supermarkets operation while other non-core assets are being disposed of. This should set up Tesco for a period of strong growth, with a more efficient supply chain, lower costs and better customer service also due to have benefit the company’s bottom line.
Furthermore, with the UK consumer outlook being upbeat and interest rates set to remain low over the coming years, Tesco could benefit from an economic tailwind. This should enable it to pay a much higher proportion of profit out as a dividend than is currently the case and with Tesco expected to increase shareholder payouts by over three times next year, it seems to be heading in this direction in the near term. Certainly, it may yield just 0.5% right now, but Tesco has excellent dividend growth potential.
