Why Royal Bank of Scotland Group plc Should Beat The FTSE 100 This Year

RBSRoyal Bank of Scotland (LSE: RBS) (NYSE:RBS.US) — what an enigma!

Since this time in 2013, the RBS share price is just about flat overall, though it’s been a volatile ride.

But the price dipped around 10% towards the end of the year, and from the start of 2014 until today it’s put on 8% to reach 361p while the FTSE 100 has struggled to beat 1%.


Now, RBS shares are up and down practically before you can blink. In the days leading up to the Scottish Independence referendum, the RBS price gained 7% before dropping back a little on Friday — make of that what you will.

But there’s been a rising price trend since April, and unless sentiment turns against the bank that Fred shredded, RBS shares look set to end 2014 ahead of the FTSE.

RBS is finally forecast to bring home its first pre-tax profit since the crisis, with a figure of £5.2bn expected for the year to December 2014 followed by £5.7bn a year later. That would mark a turnaround from last year’s massive £8.2bn loss, for sure, and shareholders should see decent earnings per share for a change.

I see no dividends

There’s not going to be a dividend this year, as the bank needs to get its capital ratios in order before the Prudential Regulation Authority is likely to allow it to start handing out cash. The best analysts are hoping for is a second-half payment next year, for an annual yield of 0.3%.

Bailed-out rival Lloyds Banking Group, by comparison, looks set to resume dividends this year with a second-half payment and an overall yield of 1.7%, rising to a predicted 4.1% next year.

So, RBS is set to beat the FTSE this year because of its return to profit and a hoped-for, if tiny, dividend at the back end of 2015?

Backed up by valuation?

That sounds like a realistic explanation, until you look at the bank’s fundamental valuation.

RBS shares are, in fact, on a forward price to earnings (P/E) rating of 12.7 for this year, rising slightly to 12.9 next year. That’s a bit below the FTSE’s long-term average of 14, but the FTSE does pay a reasonable dividend of around 3% and it pays it now.

And of we compare with Lloyds, we find the latter’s shares on forward P/Es of 9.9 dropping to 9.3, with Lloyds on better earnings growth forecasts. And there’s Lloyds’ far superior dividend expectations too.

So why is it ahead?

With RBS comparing so unfavourably to Lloyds, why does it look like it’ll beat the FTSE this year while Lloyds is set to lag the index?

It beats me. Honestly, it really does.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.