2 Reasons To Sell Royal Bank of Scotland Group plc Today

Royal Bank of Scotland Group plc (LON:RBS) is beginning to look very expensive, says Roland Head.

| 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.

In recent years, UK banks have become unlikely fans of value investing, boasting of their net tangible asset value per share at every opportunity.

The biggest advocate of this approach has been Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US), probably because it has had little else to boast about. After all, since 2008, it has logged more than £30bn in losses, and has been 82%-owned by the government: not a very appealing proposition for investors.

Until recently, I’ve been a supporter of the asset-based investment case for RBS, but now that the bank is expected to return to profitability this year, I’m no longer convinced.

It’s time to look at earnings

At the end of June, RBS’s tangible net asset value per share was 445p, which means that the bank’s shares currently trade at 84% of their tangible book value — a big discount for a FTSE 100 firm.

However, if you value RBS using its prospective earnings, it starts to look pretty expensive. Based on City analysts’ consensus forecasts, RBS has a 2013 forecast P/E of 20, and a 2014 P/E of 12.8. No dividend payment is expected before next year, at the earliest.

In my view, this valuation isn’t very appealing, given that Barclays also trades below tangible book value, has a forecast P/E of just 9.1, and offers a prospective yield of 2.4%.

Sell-off unlikely before 2015

The government has already started to sell its 38% stake in Lloyds Banking Group, but is not expected to start selling its stake in RBS before the next general election, in 2015.

This increases the risk that political interference will change the underlying investment case for RBS. The government already has a track record of interfering with the bank, and the Chancellor recently commissioned a review to look at whether RBS should be split into good and bad banks.

Whatever the outcome of the review, I wouldn’t bet against future political meddling — and it’s also possible that dividend payments won’t be allowed until the bank returns to private ownership, in order to keep voters happy.

Limited upside

RBS shares have risen by 110% since they hit a post-crisis low of 187p in November 2011. In my view, further gains could be a long time coming, and now could be the right time to sell and lock in profits, ahead of an uncertain future.

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.

> Roland does not own shares in any of the companies mentioned in this article.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

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 »