Before the Brexit referendum in July 2016, shares in the Royal Bank of Scotland (LSE: RBS) regularly changed hands for more than 350p a-piece. However, on the day the result of the referendum became known, the stock plunged below 150p. Since then, it’s struggled to get back above 270p.
But while shares in RBS have struggled to over the past three years, the bank’s underlying fundamentals have improved dramatically.
Indeed, in 2016 alone, the bank reported a loss of more than £5bn, following a loss of £1.6bn in 2015, and nearly £3bn in 2014. In 2017, RBS reported its first full-year profit since the financial crisis of £1.4bn and, in 2018, the figure hit £2.1bn.
Analysts are expecting this trend to continue in 2019. They’ve pencilled in a full-year net profit for the bank of £3.2bn.
No reward
It’s difficult to tell why the market hasn’t rewarded this better performance with a higher share price. Not only are the firm’s profits rising, but its capital ratios and return on equity metrics have also improved substantially since 2016.
More importantly, for income investors, the stock is also recently resumed its dividend payouts.
2018 was the first year since the financial crisis that the company was able to distribute funds to investors. Management declared total dividends of 5.5p for the year.
Analysts are predicting even more from the bank in 2019. The City is expecting RBS to distribute a total of 23p per share to investors for 2019, which translates into a 9.9% dividend yield on the current share price.
If you had asked me at the beginning of 2016 if RBS would offer a dividend yield of nearly 10% in three years, I’d have said “no chance.” The fact this level of income is now expected shows just how far this institution has come since then.
The one negative
The one negative of RBS’s recovery is its shrinking balance sheet. Management has been selling off non-core assets to improve the group’s capital ratios and profitability, which has dragged the book value per share down from 520p in 2013 to nearly 360p today.
That might be a disappointment for investors who bought the stock based on its book value per share, but I think it was probably the right decision by management. After all, there’s no point in having a large balance sheet if you aren’t generating any profits on it.
Back to 350p
So, considering the above, is there a chance that the RBS share price will ever be able to get back to 350p? I think there is. I see no reason why the RBS share price deserves its current low valuation, considering the progress the bank has made over the past four years. But I don’t think the market will reward the group for this hard work until the spectre of Brexit is lifted.
Until then, investors will just have to make do with RBS’s market-beating 9.9% dividend yield.
