The Best Reason To Buy Royal Bank of Scotland Group plc

There must be a reason to prefer Royal Bank of Scotland Group plc (LON: RBS) to Lloyds Banking Group PLC (LON: LLOY), mustn’t there?

| 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.

RBSI though I’d set myself a challenge today and try to think of a good reason to buy Royal Bank of Scotland (LSE: RBS) (NYSE: RBS) shares. It’s not easy.

The problem is, everything that looks positive about RBS looks even better over at Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US).

RBS is recovering, certainly, and over the past three years the shares are up more than 50% to 345p while the FTSE 100 is up less than 30%. That’s really not bad. But the markets have been more impressed by the story at Lloyds and have rewarded shareholders with a 120% gain to 73p.

While Lloyds managed to record a pre-tax profit last year (albeit a small one), RBS crunched home with a bone-jarring £8bn loss.

No cash here

Bank shares are often bought for their dividends. But not RBS, which has been unable to pay out a penny in the past five years and is not going to be doing it this year either.

That’s not surprising, as the banks are retaining cash to get their liquidity ratios up to spec, and analysts suggest that RBS will be back to paying dividends by the second half of 2015. But the forecast yield is only a measly 0.3%.

Again, Lloyds is ahead, with the bank expected to seek permission to make a second-half payment this year to provide a yield of 1.7%.

Not fair

It’s unfair to slate RBS for simply being behind Lloyds, and I’d be more attracted if current valuations reflected that difference. But even looking ahead to December 2015, we find RBS shares on a forward P/E of over 12 against Lloyds’ 2014 P/E of 9.5. It’s also way ahead of Barclays, too, and Barclays is offering 3-4% in dividends.

And after a return to profit this year, RBS has a flat year forecast for 2015. Why, then, are investors paying so much for RBS shares?

The real reason must surely be future profit expectations, with RBS being a lot further away from pre-crash levels then LLoyds and all the rest? Well, RBS is forecast to turn in a pre-tax profit of £5.2bn in 2014 followed by £5.7bn for 2015, and that’s not all that far behind Lloyds’ forecasts of £6.3bn and £7.6bn — in fact, compared to market cap RBS is already significantly ahead.

In isolation

Looking at RBS alone, the motivation for buying is surely that in a few years time those profits will be significantly higher, dividends will be back up to sector levels, and to maintain today’s P/E values there will hopefully be a share price gain.

But I really don’t see why you’d buy RBS today when Lloyds is there.

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.

Alan Oscroft 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

Young Black man sat in front of laptop while wearing headphones
Investing Articles

Investing just £10 a day in UK stocks could bag me a passive income stream of £267 a week!

This Fool explains how investing in UK stocks rather than buying a couple of takeaway coffees a day could help…

Read more »

Investing Articles

A cheap stock to consider buying as the FTSE 100 hits all-time highs

Roland Head explains why the FTSE 100 probably isn’t expensive and highlights a cheap dividend share to consider buying today.

Read more »

Investing Articles

If I were retiring tomorrow, I’d snap up these 3 passive income stocks!

Our writer was recently asked which passive income stocks she’d be happy to buy if she were to retire tomorrow.…

Read more »

Investing Articles

As the FTSE 100 hits an all-time high, are the days of cheap shares coming to an end?

The signs suggest that confidence and optimism are finally getting the FTSE 100 back on track, as the index hits…

Read more »

Investing Articles

Which FTSE 100 stocks could benefit after the UK’s premier index reaches all-time highs?

As the FTSE 100 hit all-time highs yesterday, our writer details which stocks could be primed to climb upwards.

Read more »

Investing Articles

Down massively in 2024 so far, is there worse to come for Tesla stock?

Tesla stock has been been stuck in reverse gear. Will the latest earnings announcement see the share price continue to…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Dividend Shares

These 2 dividend stocks are getting way too cheap

Jon Smith looks at different financial metrics to prove that some dividend stocks are undervalued at the moment and could…

Read more »

Investing Articles

Is the JD Sports share price set to explode?

Christopher Ruane considers why the JD Sports share price has done little over the past five years, even though sales…

Read more »