2014 has been a positive year for investors in Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US). That’s because the bank continues to turn its fortunes around, having reported several upbeat updates, and also because shares in RBS have risen by 9% year to date. This is well ahead of the FTSE 100’s decline of 3% since the turn of the year and shows that investor sentiment in the bank could be on the up.
However, there could be even more for investors in RBS to cheer about and investing in its shares could help you to retire rich. Here’s how.
An Improving UK Economy
With RBS being heavily focused on the UK, the fact that the UK economy is going from strength to strength is great news for the bank’s bottom line. It means more loans (and fees) for RBS but, more importantly, it is likely to lead to fewer write downs of assets and bad debts. This could have a significant impact not only upon RBS’s profitability moving forward, but also upon its valuation.
That’s because, with a price to book ratio of just 0.4, investors are pricing in further declines in RBS’s net asset value. While the UK economy was in decline and asset prices were falling, this seemed like a prudent stance to hold. However, now that RBS seems far less likely to write down the assets on its balance sheet, such a huge discount to net asset value seems to be very difficult to justify. As a result, shares in RBS could move upwards as a result of a reduced safety margin being applied to their valuation.
Profitability
As mentioned, RBS is forecast to return to profit in 2014. This would be the first time since the start of the credit crunch and, perhaps more importantly, it should allow the bank to recommence dividend payments.
Certainly, dividend payments are expected to be very low to start with. However, with rivals such as Lloyds aiming to pay out up to 65% of profit as a dividend in 2015, RBS could easily be yielding as much as 5.5% over the next couple of years, were it to adopt the same payout ratio as its rival.
This may seem unachievable, with RBS yet to even make a full-year profit. However, forecasts for 2014 remain fairly robust and, with its balance sheet continuing to strengthen, RBS could realistically afford to pay out 65% of profit as a dividend over the medium term.
Looking Ahead
So, while there will inevitably be further lumps and bumps ahead for RBS, its future appears to be very bright. Not only is it benefiting from an improving UK economy, it also has the potential to become a sought-after income play that has upside potential simply from a lower margin of safety being applied to its asset base moving forward. As a result, it could be a strong performer that could help you retire rich.
