Should I Invest In Royal Bank of Scotland Group Plc?

Can Royal Bank of Scotland Group plc’s (LON: RBS) total return beat the wider market?

| 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.

To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value

If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US), the troubled Edinburgh-headquartered banking organisation.

With the shares at 326p, Royal Bank of Scotland’s market cap is £20,080m.

This table summarises the firm’s recent financial record (per-share figures adjusted for 2012’s share consolidation.):

Year to December 2008 2009 2010 2011 2012
Revenue (£m) 25,868 33,026 31,798 24,651 17,941
Net cash from operations (£m) (75,338) (992) 19,291 3,325 (45,113)
Diluted earnings per share (1462p) (63p) (5p) (21.3p) (53.7p)
Dividend per share 193p 0 0 0 0

The recent interim results statement enabled Royal Bank of Scotland’s directors to declare that, “RBS Group has earned its first two consecutive quarters of overall profit since 2008.” That’s a long time to spend in the dark, but a half-time profit after tax from continuing operations of £696m, or 3.8p per share, provides one of the first real post-financial-crisis chinks of light that investors have yet seen.

The five-year financial record is a seething quagmire of big cash outflows, consistent losses and shrinking revenues. When the music stopped with the credit crunch, Royal Bank of Scotland’s huge leveraged balance sheet emerged as residing more at the liability end of the asset/liability continuum. The result was some hastily arranged capital raising events during 2008 that heavily diluted existing shareholders and left most of the new shares in the hands of Her Majesty’s Treasury.

Since then, a focus on simplification and efficiency has seen the firm restructure to ditch many of its pre-crisis big-earning but capital-intensive lines of business that rely so much on money-market funding. By focusing on capital strength, the directors aimed to build a secure platform for growth along more traditional banking lines.

A return to profit now signals some progress with the plan. But although RBS is currently trading well below its net asset value, I reckon it needs to prove itself with consistent earnings and positive cash flow before the share price is likely to lift. I’m neutral on the firm’s total-return prospects from here.

Royal Bank of Scotland’s total-return potential

Let’s examine five indicators to help judge the quality of the company’s total-return potential:

1. Dividend cover: recent positive earnings suggest potential for future dividend cover. 1/5

2. Borrowings:  at around £37 billion, wholesale funding is much larger than earnings.1/5

3. Growth: recent positive earnings and reducing cash outflow.   3/5

4. Price to earnings: a forward 10 looks fair given the uncertainties. 3/5

5. Outlook: satisfactory recent trading and a cautiously optimistic outlook.  3/5

Overall, I score Royal Bank of Scotland 11 out of 25, which inclines me to caution with regard to the firm’s potential to outpace the wider market’s total return, going forward.

Foolish summary

RBS still has a lot to prove, but recent progress on cash flow and profitability is encouraging. I already own some shares, which I’ll now hold to see what happens.

If I were buying for the first time, Royal Bank of Scotland would probably stay on my watch list in favour of more consistent earners that pay rising dividends, too. But companies with seemingly impregnable, moat-like financial characteristics can be hard to come by, which is why I’m enthusiastic about a new Motley Fool report, prepared by our top analysts, that highlights five such shares.

“5 Shares To Retire On”, presents five shares that deserve consideration by investors aiming to build wealth in the long run. For a limited period, the report is free. I recommend downloading your copy now by clicking here.

> Kevin owns shares in Royal Bank of Scotland.

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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »