The government still has an 81% stake in Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) and if taxpayers are to break even then the share price needs to rise to at least 500p.
The shares have been trading at around 340p so far in June but, before we’re to see sizeable gains, the political overhang needs to be lifted. Speculation has it that the sale of a tranche of shares — worth £5bn — could take place before the general election.
Is this likely?
Well, as the UK economy continues to recover, RBS is likely due an uptick in fortunes. But until the government can be sure that it can sell down its stake for anything better than a loss then we’re likely to see some reticence to do so.
It’s something of a vicious circle.
Earnings potential
Shares in RBS trade at 16 times next year’s forecast earnings (21p). Two years out, earnings are expected to increase to 28p, and if we assume a P/E ratio (share price divided by earnings per share) in line with the FTSE’s average of 14, then the shares could rise to 392p.
That’s a gain of 14% but falls under the FTSE’s average performance in the last two years by 10 percentage points.
We’re still more than 100p from break-even and, if you bought shares in RBS today, then on this evidence your investment could significantly underperform the market.
Dividend boost
RBS has reached an agreement with the Treasury to buy out the instrument preventing shareholders from being paid a dividend. The Dividend Access Share (DAS) — which gives the state priority over dividends — was created in 2008 after RBS was rescued for £46bn.
The DAS has been a major roadblock to the bank becoming “normal” again. RBS will pay up to £1.5bn to retire the share — subject to shareholder approval at next week’s AGM — and analysts have tentatively predicted a 10p per share dividend for 2015.
At current prices shares in RBS could offer a prospective income of 2.9%. If we factor the dividend into the share price then the shares could reach 402p, but we’ll still, in all likelihood, underperform the market at this price.
30p more could be added to the shares after the situation at subsidiary Ulster Bank is fixed. The closest we can get to 500p, therefore, is 432p, albeit at this price RBS shares could offer a 27% return, outstripping the FTSE’s gains over the last two years by 3 percentage points.
