HYP4: Pyad Picks RBS

Stephen Bland adds Royal Bank of Scotland to his fourth High Yield Portfolio.

My choice for May, being the ninth share for my fourth High Yield Portfolio (HYP), is Royal Bank of Scotland (LSE: RBS) .

Adding a refreshing lack of diversification because I already have Lloyds TSB (LSE: LLOY) , RBS is almost irresistible for HYPers seeking a second bank. It enters the portfolio at 1,920p plus costs with a forecast yield of 5.1%. That places it fourth in the FTSE 100 yield table based on consensus forecasts for next year. And I already have the top three yielders in that table, Lloyds TSB, United Utilities (LSE: UU.) , DSGI (LSE: DSGI) , in HYP4.

Thus RBS is now the second highest yielding bank, a position which for some time, from memory, has been occupied by Alliance & Leicester (LSE: AL.) though A&L is a mortgage bank and thus could be considered as a slightly different sector to the major general banks like Lloyds TSB and RBS. RBS has recently overtaken A&L as the second highest bank yielder with the latter now fifth in the table.

The advancement of RBS up the yields is because its price has fallen back relative to other banks. This may be due perhaps to its bid for Dutch bank ABN Amro , ameliorated to an extent by the fact that RBS is one of a group of three banks acting in concert as bidders.

Wearing my short term value player's hat for the moment, acquisition is the enemy of value as it tends to knock the bidder's share price, but for eternity HYPers it don't make no difference. I don't really care why RBS is now such a fat yielder, barring only a major deterioration in the fundamentals of course, but I intend to take advantage of it.

Actually, the top ten yielders in this FTSE100 table include six banks, which for anyone who hasn't been following such things must be quite surprising.

After all, they're hardly down on their luck at the moment, are they? And if even if you agree with the view that the market always looks ahead when deciding on share valuations, is there something of such cataclysmic proportion out there that makes the banks deserving of such poor ratings? Maybe. I could come up easily with a list of potential bank banana skins if I turned my mind to it. But Strategic Ignorance tells me to avoid such considerations.

I don't mind having a second bank in the portfolio because banks are such a major proportion of the market, assisted no end by the fact that so many of their yields are very tempting. In fact, all my model portfolios contained two banks though HYPs 1,2, and 3 held Lloyds TSB plus a mortgage bank. So I'm departing from the pattern somewhat with HYP4 here by deciding to go for two major banks.

RBS dividend is forecast for its year to 31/12/07 at 99.3p which on my total purchase cost makes a forward yield of 5.1%. Not only that but RBS has a fine history of increasing its dividends by attractive rates. The 07 payout, for example, was 9.6% higher than the 06 dividend of 90.6p which, in turn, was a pretty chunky 25% higher than 05.

And the icing on the RBS cake is that the P/E is dead low too. With the 07 eps forecast at 213.5p, the forecast P/E is around 9. That must be one of the lowest forecast P/Es of any big cap.

However that figure probably takes no account of the effect of the ABN Amro bid on eps. I don't know what the latter might be and I'm far too indolent to try and work it out, principally because for HYP purposes it doesn't really matter. What does matter here is whether the dividend will be affected adversely, and I can't find anything to suggest it might.

For HYPers having only one bank, Lloyds remains the one to go for because its yield is still way out ahead but right now, RBS with its yield a little ahead of A&L definitely hits the spot for me as the second bank of choice.

Here's HYP4 to date including the latest purchase:

Of the shares shown I hold BATS, BP, BT.A, DSGI, LLOY, RBS, UU