The news flow for RBS (LSE: RBS) (NYSE: RBS.US) just keeps getting better.
The latest item was the announcement of a sale of another 18% of Direct Line, the insurance subsidiary that RBS brought to the stock market around a year ago.
The sale is set to raise in the region of £630 million and, should it proceed as expected, will reduce RBS’s stake in Direct Line to less than 30%.
Of course, RBS is required to sell Direct Line in order to comply with state aid rules, after the bank received a government bailout during the credit crunch.
However, I believe that it is, nonetheless, good news because it is yet another example where RBS is transforming itself into a more focused and ruthless bank that wants to make sure its core offering (i.e. banking) works well. This is in direct contrast to the RBS of 5+ years ago that sought a range of subsidiaries and diversification.
As such, I’m bullish on RBS and am thinking of adding to my shareholding for the following three reasons.
Firstly, RBS’s cost: income ratio has improved drastically since its lowest ebb during the credit crunch. Indeed, at its worst it was a sky-high 97% but is now well on target of meeting the medium term goal of less than 50% (a lower ratio shows that costs are a smaller proportion of income).
Although it still lags behind the cost: income ratio of peers such as Lloyds and HSBC, it is now satisfactory and is showing a downward trend… highlighting that RBS is becoming a more profitable bank.
Secondly, although RBS does not currently pay a dividend, it is due to commence payment in 2014. However, the key point for me on this topic is that the dividend payout ratio will be extremely low at around 7%. Clearly, RBS could pay a much higher dividend and the potential for this to be the case keeps me interested as an income-seeking investor.
Thirdly, a chart of RBS’s share price over the last year shows that shares have reached a one-year high recently. In my view, this shows that market sentiment is continuing to improve and that investors are backing the company’s strategy and turnaround plan. Such sentiment could mean that shares continue their upward trend and make higher highs.
So, I’m encouraged by the continuation of RBS’s disposal plan, with the sale of more shares in Direct Line being another positive move. I’m also thinking of adding to my shareholding because of an improving cost: income ratio, a favourable share price chart that shows a strong pickup in sentiment and the potential for a much higher payout ratio from 2014 onwards.
