RBS isn’t the only FTSE 100 dividend share I’m avoiding like the plague

Royston Wild explains why Royal Bank of Scotland plc (LON: RBS) isn’t the only (INDEXFTSE: UKX) income share to be avoided today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Royal Bank of Scotland (LSE: RBS) has seen its share price trek lower again in recent months as the prospect of slumping revenues and rising bad loans has intensified. And I for one cannot blame share pickers for switching out.

More on RBS in a second. First I want to look at another FTSE 100 share which also stands on extremely shaky foundations: DIY specialist Kingfisher (LSE: KGF).

A dire DIY outlook

Last time I covered the retailer in February I spoke about the trouble it was experiencing due to the disruption caused by its five-year ‘ONE Kingfisher’ transformation strategy. While the business said it was taking steps to address these troubles, the newsflow has since worsened.

Last month the B&Q and Screwfix owner’s share price fell off a cliff after the firm advised that like-for-like revenues dropped 0.7% in the 12 months to January 2018, a result that drove adjusted pre-tax profit 8.1% lower to £683m.

Kingfisher really gave the market jitters when, commenting on the “mixed picture” for its territories in the current year, it said that “the UK is more uncertain” while “France is encouraging yet volatile.”

Despite this disappointing update, however, City analysts are expecting Kingfisher to bounce back from the 11% earnings drop recorded last year with rises of 18% in both fiscal 2019 and 2020.

I believe such predictions are in huge jeopardy of being downgraded, given the difficulties recently being reported by many of the country’s home improvement retailers like Topps Tiles and Carpetright, not to mention the worsening trading conditions on the other side of the English Channel.

By extension, I reckon hopes of punchy dividend growth over at Kingfisher are looking a bit strained too, the Square Mile anticipating payouts of 11.5p this year and 13.3p next year, up from the 10.82p dividend of fiscal 2018.

Some investors may still be tempted in by meaty yields of 3.8% and 4.4% for fiscal 2019 and 2020 respectively, while some would argue that a forward P/E ratio of 11.7 times also bakes in the possibility of prolonged earnings strife. I am not convinced and reckon there are much safer income shares to be found across the FTSE 100.

Steer clear of RBS too

Like Kingfisher, RBS can also be picked up on a cheap paper valuation, the bank sporting a forward P/E multiple of 10.8 times.

However, the poor outlook for the UK economy does not convince me that earnings may rise at all in 2018, a fractional advance is currently forecast by City boffins. I also fail to be soothed by predictions of an 11% profits rise next year.

This, combined with RBS’s wafer-thin balance sheet (it emerged from Bank of England capital stress tests  by the skin of its teeth late last year) and the prospect of more crushing misconduct penalties, does not convince me that dividends are about to be reinstated either. This is despite the business announcing plans this week to slip £3.5bn into its pension scheme in a move seen as key to the bank making payments to its shareholders again.

Current estimates suggest payouts of 6.4p this year and 11.9p for 2019, figures that yield 2.4% and 4.4% respectively. I remain to be convinced by RBS as a decent dividend bet, however, and reckon stock selectors should stay away.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »