On the face of it, RBS (LSE: RBS) (NYSE: RBS.US) may not seem like it has the potential to be a super income stock. For instance, it hasn’t paid a dividend throughout the credit crunch and has made a loss in each of the last five years. Furthermore, it continues to be weighed down by spiralling PPI costs and a relatively large amount of political risk.
However, the next five years are unlikely to be a carbon copy of the last five. So could RBS prove to be a super income stock in future?
2014 is forecast to see RBS pay its first dividend since 2008. Although it looks set to be only a small dividend, it is a dividend nonetheless and coincides with the first year that RBS is expected to make a net profit, with the bank forecast to deliver earnings per share (EPS) of just under 25p.
As mentioned, the dividend is set to be small at just 0.5p per share. This puts RBS on a yield of just 0.15% — hardly anything to get excited about. As you would expect, the yield doesn’t compare favourably to the FTSE 100 average of 3.5% and is well-behind both inflation and the rate on a typical high street bank account.
However, a dividend of 0.5p per share represents just 2% of forecast EPS for 2014. As such, RBS seems to be starting (very) slowly with dividend payments but has the potential to significantly quicken the pace. For instance, dividends per share in 2015 are forecast to increase seven-fold to over 3.5p per share, which would put RBS on a yield of 1.1%.
While this is still a relatively low yield, dividend payments in 2015 would still only represent 13% of profits. With peers such as Lloyds and Barclays targeting dividend payout ratios of up to 65% of profits, it is clear that RBS could continue to increase dividends per share at an extremely fast pace. In time, this could mean a dividend that not only holds its own when compared to the wider market, but becomes relatively attractive, too.
So, while RBS may not be classed as a super income stock at present — owing to its nominal yield — it appears to have the potential to become an attractive income play. With profitability set to improve in the coming years, RBS could regain its status as a key part of income-seeking portfolios over the medium to long-term.
