MENU

The RBS share price is rising. Is it time to buy?

Image source: Getty Images.

The market proved to be way too optimistic, way too soon, about the recovery prospects for Royal Bank of Scotland  (LSE: RBS) after the financial crisis. The shares were up to 576.5p by the end of August 2009 and hit a new post-crisis high of 580.5p the following April. They haven’t been anywhere near those levels in the long years since.

However, having traded as low as 148.9p in the aftermath of the Brexit vote, they’ve since climbed hand over fist to post terrific gains. Even with the banking sector wobbling somewhat on the current political uncertainty in Italy, the price is around 280p. Is this performance just the start of RBS’s comeback? Is it time to buy?

Cause for optimism

Shareholders attending the bank’s AGM in Edinburgh this afternoon certainly had cause for optimism. After nine year’s of losses, the company swung to a profit of £752m in 2017. And this year, in Q1 alone, it has booked £792m.

Other reasons for positivity include RBS’s continued progress on putting legacy issues behind it. Most notable was the recent announcement that the bank has agreed a $4.9bn settlement with the US Department of Justice to resolve its probe in relation to past subprime mortgage activity. This is the last major legacy legal case against RBS and the settlement is at the lower end of analysts’ expectations.

The City consensus is that the bank will now post underlying earnings per share (EPS) of 25p this year and pay a dividend of 7.55p (30% of EPS). At the current share price, the price-to-earnings (P/E) ratio is 11.2 and the prospective dividend yield is 2.7%.

Over-optimism

Analysts at Berenberg issued a particularly bullish note this week, reckoning RBS is ready to set a higher payout ratio and pay special dividends to boot. They forecast 15p this year, giving a yield of 5.4%, and 25p next year, which would increase the yield to 8.9%.

However, such payouts look unlikely to me. Chairman Howard Davies remarked at today’s AGM: “We have always said that any dividend payments will start small and grow incrementally. In my view, that remains the most sensible approach.”

Berenberg also reckons RBS could afford share buybacks of up to 15% of today’s market value. Possibly so, but I’m less sanguine than Berenberg about the potential depressive impact on the share price of the government’s sale of its 70% stake in the bank.

Cause for pessimism

Combinations of various factors, including government share sales, potential for a surge in PPI claims with still over a year to go to the deadline, Brexit uncertainty and a possible crisis in Europe, could result in various negative outcomes for RBS’s shares, ranging from no headway all the way to a crash.

A little bit of additional uncertainty has been added by the shock announcement this morning that chief financial officer Ewen Stevenson has resigned “to take up an opportunity elsewhere,” and that RBS appears to have had no succession plan in place. It said “the search for a successor will commence immediately.”

Undoubtedly, the bank has made great strides. However, in my view, the range of external factors that could negatively impact the company is not being sufficiently compensated for in the current valuation. As such, I’m avoiding the stock for the time being.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. There are no strings attached, simply click here for your free copy.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.