Why Royal Bank of Scotland Group plc Offers Poor Value For Money

In this article I am looking at why I believe Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) is a poor value pick at present.

Price to Earnings (P/E) Ratio

Royal Bank of Scotland’s continued troubles since its bailout back in 2008 are well documented, and the bank has swung back and RBSforth from solid earnings growth to hefty losses each year as its restructuring plan has taken an age to kick into life.

Still, optimism that the bank has finally put the worst of its troubles behind it has helped to keep share prices supported. Indeed, based on City forecasts the institution currently changes hands on P/E multiples of 14.1 and 12.8 for 2014 and 2015 respectively, representing a premium to a prospective average of 15.1 for the entire banking sector.

Price to Earnings to Growth (PEG) Ratio

Royal Bank of Scotland is expected to experience solid growth over the next two years, based on current forecasts, and brokers anticipate the business to swing from losses of 38.3p per share in 2013 to earnings of 24.3p in 2014. A further 11% advance to 26.9p is forecast for 2015.

The bank’s transition back to earnings growth this year does not create a valid PEG rating, but for next year this registers at 1.2, just above the bargain benchmark of 1.

Market to Book Ratio

Royal Bank of Scotland holds a book value of £59.2bn after subtracting total liabilities from total assets. This calculation produces a book value per share of £5.52, which in turn results in a market to book ratio of 0.6.

Dividend Yield

Royal Bank of Scotland has failed to shell out a dividend to shareholders following its bailout by the UK taxpayer, but made a serious statement last month by successfully having the ‘Dividend Access Share’ — which gave the UK government preferential dividend entitlement — annulled by the regulator.

Following the move, forecasters expect the firm to shell out a dividend of 0.1p per share this year and 1.5p in 2015. However, these payments seriously lag the competition — 2014’s payment does not even register a positive yield, while 2015’s projection results in a 0.4% yield. By comparison the wider banking sector carries a forward average yield of 3.1%.

An Underwhelming Growth And Income Pick

Looking at the firm’s medium-term earnings and dividend outlook, in my opinion Royal Bank of Scotland offers scant value for investors. I believe that the possibility of further political intervention in the next few years, the multitude of legal issues overhanging the firm, and uncertain revenue outlook at its core operations makes it a highly risky stock selection, and that significant earnings downgrades could materialise.

Meanwhile I believe that the bank’s sub-1 market to book rating reflects the bank’s limited growth opportunities rather than good value, a situation exacerbated by its rampant divestment scheme which significantly undermines the company’s growth potential.

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> Royston does not own shares in Royal Bank of Scotland.