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MARKET COMMENT
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Royal Bank of Scotland (LSE: RBS) has issued another impressive set of annual results, with underlying profits climbing above £7b for the first time. Worries that it may overpay to expand in the US (who said Vodafone (LSE: VOD)?) have held the shares back in recent months though. However, they look too cheap in my view. The company is undoubtedly one of UK plc's major success stories of recent years and has seen its market value climb to almost £50b, in no small part due to its successful takeover of NatWest. The progress has made the bank an easy target for those claiming it's been making excess profits at the expense of consumers. Those calling for a banking windfall tax need their heads examined though. It's not that hard to shop around for competitive banking products -- there are plenty of them around -- and don't forget it's our pensions and investment funds that own these companies. A tax on them is a tax on us -- talk about turkeys voting for Christmas! Rant over. RBS has managed to increase its annual dividend by 15% for the last eleven years. Despite this, it still has one of the lowest dividend yields among the major banks at just 3%. However, this is because it pays out less than a third of its profits. Now the final payments for the NatWest takeover have been made, shareholders could well see some additional handouts. The company is expected to generate lots of cash over the next few years and this has led to the concern that it may overpay for a large US acquisition. Management today emphasised, yet again, that they had no wish to pay top dollar. RBS has made a series of smaller acquisitions over the pond in recent years, but still generates three-quarters of its income here in the UK. Based on the results, at 1,670p, the shares stand on a historical price to earnings ratio of 10.5 times. On current forecasts for 2004, they are valued at just under 10 times. But these forecasts could well be raised after this performance. The shares look good value.