I’m always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market has been overheating.
So right now I’m analysing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today’s uncertain economy.
Today I’m looking at Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) to determine whether the shares are still safe to buy at 301p.
So, how’s business going?
Over the past year or so, the market has been pleased with RBS’ performance as the company continues to rebuild itself. Indeed, the bank is in line to report a profit this year — its first since 2007.
However, City analysts have recently expressed concern that last month’s departure of turn-around chief Stephen Hester could slow the company’s final return to profitability.
Furthermore, RBS’ management has revealed that the bank is becoming harder to run on a commercial and profitable basis as the UK government is increasingly intervening in the group’s operations, causing disagreements between the bank and its political partners.
That said, the bank’s day-to-day operations continue to perform well, and in May, RBS reported its first quarterly profit since 2011.
Moreover, the bank’s tier 1 capital ratio continues to improve and stood at 10.8% at the end of the first quarter, up from 10.3% at the end of 2012.
Expected growth
As I’ve said, RBS is expected to return to profit this year and many City analysts expect the bank’s earnings to grow rapidly next year as well. City forecasts currently predict earnings of 21.3p per share for this year (growth of 238%) and 31.5p for 2014.
Shareholder returns
Unlike some of its peers in the banking sector, RBS does not currently offer investors a dividend.
However, City analysts currently predict that the bank will begin to offer shareholders a token payout of 1.7p a share during 2014 to support an indicative dividend yield of 0.6%.
Valuation
As RBS has not made a profit since 2007, it is not possible for me to calculate a historic P/E ratio for the company.
However, based on analyst estimates for future earnings, I believe the bank is currently trading at a forward P/E ratio of 14.2, cheaper than the company’s peers in the banking sector, which are currently trading at a historic P/E of 18.8.
Foolish summary
RBS is making a slow and steady return to health but the company is being hampered by government intervention and, after the upcoming departure of Stephen Hester, many investors are now anxious about the company’s future.
So overall, I feel that Royal Bank of Scotland does not look safe to buy at 301p.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.
