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Royal Bank of Scotland Group plc isn’t the only dividend-plus-growth stock I’d buy today

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For a few years I’ve seen Royal Bank of Scotland Group (LSE: RBS) shares as too expensive. They came back from the banking crisis almost as strongly as shares in Lloyds Banking Group, yet RBS was way behind the black horse in the strength of its recovery and in its prospects for the return of dividends.

I think the markets did eventually recognise that, and we saw a cooling-off of the premature exuberance and a retrenchment of the share price — and between November 2014 and July 2016, the shares lost more than half their value.

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That’s made a huge difference, and with dividends firmly on the near horizon, I see good reasons to buy now. Analysts are forecasting a yield of a relatively modest 3.4% this year, but they expect that to rise to 5.8% in 2019, and that would be covered twice by forecast earnings.

Profit!

Results for 2017 released in February reinforced my optimism. The bank “reported its first ‘bottom-line’ profit in 10 years,” revealing a 31% rise in its adjusted operating profit to £4,818m.

There was a modest 2.2% increase in net lending to £6bn, and though that was behind the targeted 3% rise, it’s still significant — and with a focus on supporting liquidity, RBS’s lending will be a lot less risky now than in the past. A CET1 ratio of 15.9% is impressive, and is higher than the 15.5% reported by Lloyds in the same month.

The bank expects to maintain its CET1 ratio in excess of its 13% target in the medium term, and tells us it’s aiming at a return on equity in excess of 12% by 2020.

On top of those cracking forecast dividend yields, we’re looking at P/E multiples dropping below 10. That’s got to be cheap.

Uprating

Shares in soft drinks producer Britvic (LSE: BVIC) got a 6% boost Thurday morning after Morgan Stanley released a significant uprating. 

The new sugar tax to be levied on soft drinks had caused a bit of a wobble, and the shares have fallen back after the firm’s trading update in late January, despite a 3.3% rise in first-quarter revenue to £337.2m.

The company said at the time that “the introduction of a soft drinks industry levy in the UK and Ireland brings a level of uncertainty, but we are well placed to navigate this given the strength and breadth of our brand portfolio.

Rising input costs due to the weakness of sterling aren’t helping, but I don’t see either as being long-term problems. Still, markets do over-react to short-term issues like this, often providing long-term investors with buying opportunities.

Price target

Morgan Stanley has said that it initially “liked the long-term prospects” at Britvic, and has now added that, despite the sugar tax and rising cost issues, it is still “cautiously optimistic about Britvic’s prospects.” The investment firm has upped its price target on the shares from 680p to 870p, and that’s significantly ahead of current 720p levels.

Is Morgan Stanley right? I think so. Britvic’s EPS growth looks set to slow for a year or two, but P/E multiples stand at 12.7 for this year and 12.1 next. Considering the predictions for dividend yields of 4% and better, around twice covered by earnings, I see a bargain here.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK owns shares of and has recommended Britvic. The Motley Fool UK has recommended Lloyds Banking Group. 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.

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