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Why the RBS share price looks set to surge higher than the Footsie this year

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While RBS (LSE: RBS) may have risen by the same 3% over the last year as the FTSE 100, the prospects for the bank appear to be bright. It may continue to face legacy challenges, but its overall performance seems to be sound and could lead to strong earnings growth.

As a result, the company could deliver better total returns than the wider index. Of course, it’s not the only stock that could do so, with one small-cap stock reporting positive results on Thursday.

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Financial outlook

While the UK banking sector continues to face challenges such as a slowing rate of economic growth and continued regulatory issues such as PPI, its prospects appear to be improving. For example, the decade-long period of loose monetary policy now seems to be at an end, with interest rate rises expected to increase in frequency over the next few years. This could create more profitable trading conditions for the industry, and may lead to improving financial performance.

With RBS putting in place what seems to be an improving business model that focuses on efficiency and its core operations, its financial outlook is due to improve. Next year it’s forecast to post a rise in earnings of 11%, which suggests that its strategy is starting to pay off. And with it trading on a price-to-earnings growth (PEG) ratio of 1, it could be viewed as undervalued on a relative and absolute basis.

Income potential

One measure of the value appeal and financial strength of a business is its dividend prospects. A fast-rising dividend can indicate that a company’s management is positive about its long-term prospects, while a high yield suggests a margin of safety may be on offer.

In both of these areas, RBS seems to have appeal. It’s due to raise dividends per share by 82% next year, which puts it on a forward yield of 4.7%. And with shareholder payouts expected to be covered 2.1 times in 2019, there seems to be scope for an even higher dividend over the medium term. As such, the company appears to offer a mix of value and income appeal, and could therefore deliver outperformance of the FTSE 100 over the medium term.

Growth potential

Also offering scope to beat the Footsie at the present time is OnTheMarket (LSE: OTMP). It operates the online property portal of the same name and released generally positive results on Thursday. They’re its first set of full year results following its listing in February.

Encouragingly, traffic to its website increased from 21.9m in the 2017 financial year to 42.2m visits in 2018. As at 25 May, the company had signed listing agreements with UK estate and letting agents that together have more than 8,500 offices, which is a rise of 54% since its admission to the stock market.

Clearly, OnTheMarket faces a significant amount of competition. The industry is dominated by a very small number of companies, and breaking their grip on it could prove challenging. As a result, its risks appear to be high.

But with what seems to be a sound strategy and positive growth in listings and traffic numbers, its long-term potential seems to be positive. Therefore, now could be a good time to buy it.

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Peter Stephens owns shares of Royal Bank of Scotland Group. 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.

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