On the face of it, a 2% gain since the start of the year hardly looks impressive. However, when you consider than the FTSE 100 is up just 1% over the same time period and shares in many of the UK-listed banks have performed much worse year-to-date, RBS’s (LSE: RBS) (NYSE: RBS.US) share price gains are not at all bad. However, there could be much better to come over the medium to long term and RBS could deliver a return of 28%. Here’s why.
A Long Term Project
After making a huge amount of progress during the last few years, RBS is due to report its first full-year of profit since before most UK investors had ever heard of the term ‘credit crunch’. The bank is all set to deliver a pre-tax profit of over £5 billion this year and, although its recent results showed that it is making strong progress, there is still much further to go.
That’s because RBS continues to have a number of non-core assets that it wants to sell, as well as further write downs to make to its asset base. Clearly, neither of these two areas pose as much of a problem as they have done in the past, but at the same time it would be inaccurate to say that RBS is back to full health, simply because it is now profitable. There is still a long way to go, but RBS is making great progress at present.
Long Term Potential
However, the bank has vast long term potential. That’s because in 2015 it is forecast to deliver earnings per share (EPS) of 28.2p, but is only forecast to pay out 1.3p per share as a dividend. That equates to just 4.6% of profit, which is extremely low on an absolute basis as well as on a relative basis, since sector peers such as Lloyds are aiming to pay out up to 65% of profit as a dividend by 2016.
Were RBS to adopt a more generous stance with regard to its dividend payout ratio (which is entirely feasible given its improving financial circumstances) it could mean that shares trade at a much higher price. For instance, paying out 50% of profit as a dividend in 2014 would equate to dividends per share of 14.1p. Assuming RBS trades at the same yield as the FTSE 100 (around 3.2%), this would equate to a share price of 440p, which is 28% higher than the bank’s current share price.
Looking Ahead
Certainly, there will be lumps and bumps in the road ahead for RBS. However, with profitability set to return this year and the bank having huge potential when it comes to dividend payments, it could be the catalyst to send the bank’s share price much higher. As a result, RBS could be well-worth buying right now.
