Is It Finally Time To Buy Into Royal Bank of Scotland Group plc, As It Continues To Lag The FTSE 100?

With Royal Bank of Scotland Group plc (LON: RBS) falling behind the FTSE 100 (INDEXFTSE:UKX), is it a bargain buy right now?

| 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.

With Royal Bank of Scotland (LSE: RBS) reporting a first-half rise in profitability on 30 July, the rumour mill is abuzz with claims that the government is squaring up to sell-off of some of its 81% shareholding. Most commentators suggest that Chancellor George Osborne has plans to start the process sometime in the next few weeks, with some even having claimed he’d try to place some shares with institutions as early as today.

With RBS lagging the FTSE 100 over the past 12 months, while rival banks have been beating it, is it a good time to buy RBS now, ahead of any renewed government sale? I’m not sure it is.

FTSE stagnating

At 6,698 points as I write, the UK’s top index stands at exactly the level it was 12 months ago (all bar a fraction of a percent), having being hit by fallout from the Greek tragedy of the past few months. Compared to that, RBS shares are down 3% in the same period — but Lloyds, the other bailed-out bank, has seen its shares rise 13% over the past year and Barclays has soared to a 29% gain.

The problem was, as I wrote a year ago, RBS looked overvalued on its then-current fundamentals. It was at least a year behind Lloyds in getting back to earnings growth and resuming dividends, yet its shares were commanding a higher valuation. That could have been justified had there been strong earnings growth forecast for RBS for the next couple of years, but the City’s analysts were pretty cagey on that score.

Too expensive

A year on, and despite the price fall, I still think RBS shares are overpriced. There’s a P/E of 14.5 suggested for the year ending December 2016, but RBS is still only expected to be offering dividend yields of around 1% that year — and there’s a lot of uncertainty twixt now and then. And some of the pricing might well be due to relatively low liquidity — the government still owns 79% of the bank, while its stake in Lloyds is now down to 14%.

By comparison, forecasts for Lloyds suggest a P/E of only a little over 10, and that’s with forecast dividend yields approaching 5% — and there’s a pretty firm Buy consensus for Lloyds from the City, whereas RBS is rated a Sell.

Critics of the government’s mooted plans to sell off a tranch of RBS point to the fact that the shares were bought for around 500p apiece, and they’re currently changing hands for 341p. Selling now, they point out, would realise a loss for the taxpayer — better to wait at least until break-even point, surely.

A daft strategy

But from an investor’s stance, that’s a mug’s approach, as the value of an investment you hold today is entirely unrelated to the price you originally paid for it. Anyone planning to sell RBS today (like the Chancellor, allegedly) should base the decision only on today’s price and the prospects for future value.

On that score, I certainly wouldn’t be buying RBS shares today, and that 341p could be a decent price for taxpayers to get if they do end up being sold for us.

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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

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

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »