Anglo American plc or Royal Bank of Scotland Group plc – which is the better investment?

Bilaal Mohamed compares the investment appeal of Anglo American plc (LON: AAL) and Royal Bank of Scotland Group plc (LON: RBS) – which is the best investment?

| 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.

Today I’ll be discussing the outlook for multinational mining giant Anglo American (LSE: AAL), and banking group Royal Bank of Scotland (LSE: RBS). Which of these FTSE 100 blue-chips is the better investment?

Downsizing

Shares in diversified miner Anglo American fell by almost 12% today as the market woke up to weak Chinese manufacturing data. Last week it was revealed that the company had agreed to sell its niobium and phosphates businesses to China Molybdenum for a cash consideration of $1.5bn. The sale is part of the mining giant’s plans to downsize and restructure its business and continue its debt reduction, which also involves selling its coal, nickel, and iron ore assets. The downsizing will eventually lead to the company focusing more on its De Beers diamond mining business, copper interests, and its platinum arm, Anglo American Platinum.

Anglo’s shares have performed well recently, soaring 146% in the last three months alone, but are still down 42% since this time last year. Analysts are expecting a poor performance from Anglo this year, with consensus forecasts predicting a 34% decline in underlying profits to £421m, or 28.73p per share. Next year however should see a strong recovery, with a 39% improvement to £580m, or 40.01p per share.

Anglo American trades on 25 times forecast earnings for the year to December 2016, falling to 19 next year. In my opinion the shares are still far too expensive given the high price-to-earnings ratio, and this presents investors with a high level of risk, especially if commodity prices decide to head south again.

Contrarian conumdrum

The Royal Bank of Scotland Group revealed earlier this week that the RBS brand was set to disappear from many high streets in a bid to improve its image and recover from the adverse publicity surrounding the government bailout and financial crisis. The banking group’s key brand in England & Wales will be NatWest with around 1,000 branches, whilst a further 300 branches will be rebranded as Williams & Glyn’s, which is expected to be sold off by the end of next year.

Meanwhile, in Scotland, the group’s 200 or so branches will be renamed Royal Bank of Scotland, whilst the Ulster Bank brand will be retained in Northern Ireland and the Republic of Ireland. The banking group was bailed out by the UK government in 2008 to the tune of £45bn, and is still 73% owned by the British taxpayer.

RBS shares have fallen by more than a third in the past twelve months and and now seem to offer good value over the medium term. Our friends in the City are expecting a 38% fall in earnings this year to £2.1bn, before bouncing back 25% to £2.7bn next year. This would leave the shares trading on a forward price-to-earnings (P/E) ratio of 13 for this year, falling to just ten for the year ending December 2017. Contrarian investors will be looking to buy RBS on the cheap whilst market sentiment is low.

The verdict

Anglo American is not an attractive investment for me as the risk-reward profile is unfavourable, furthermore the company offers no meaningful dividend to appeal to investors looking for income.

RBS on the other hand looks good value at the moment, given the low forward P/E rating and strong recovery in earnings next year. The shares should be attractive to contrarian investors looking to take a long-term position in the out-of-favour banking sector. RBS is by far the better investment in my view.

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.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

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

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »