Royal Bank of Scotland Group (LSE: RBS) will pay a dividend in 2018 for the first time since the financial crisis. Shareholders will receive an interim dividend of 2p per share, once the timing of the bank’s $4.9bn settlement with the US Department of Justice has been finalised.
The bank announced its dividend plans today alongside a solid set of half-year results.
Broker forecasts suggest the stock’s dividend yield could now reach 5% in 2019. After looking over the figures this morning, I’m convinced that RBS could be one of the best dividend buys in the FTSE 100 today. Here’s why.
Lifting the load
Today’s figures show that the group’s operating profit fell by 6.4% to £1,826m during the first half. But this profit figure included an £801m charge for litigation and misconduct issues. That’s double the £396m charge reported during the same period last year.
These costs relate to PPI compensation and to the bank’s legacy issues from the period around the financial crisis. They’ve been a drag on profits, but should mostly be resolved by next year. This should lift the group’s earnings, even without any improvement in operating performance.
The good news is that the bank’s management isn’t resting on its laurels. RBS’s performance has improved significantly since last year.
More profitable banking
Excluding litigation and misconduct charges, I calculate that the bank generated an underlying operating profit of £2,627m during the first half. That’s 12% higher than during the same period last year.
I believe the bank’s underlying profit margins are also rising. My calculations suggest that the bank’s return on tangible equity would have risen from 6.8% in H1 2017 to 7.7% in H1 2018, excluding litigation and misconduct costs.
Dividend = more buyers
After June’s £2.5bn share sale, the government owns 62.4% of RBS. But selling off these remaining shares should be much easier from now on.
Many City fund managers are only able to buy big-cap stocks which pay dividends. Some have also been avoiding the bank because of its previously unresolved legacy issues. So RBS has been off the buy list for many funds since 2009.
Now that chief executive Ross McEwan has fixed these problems, I expect to see a wider range of fund managers buying the shares. This should make it easier for the government to continue selling its stock without depressing the share price.
Too cheap to ignore
I already own a slice of RBS stock, but after today’s results I’m thinking about buying more.
Although operational improvements are still needed to cut costs and improve returns, this should get easier now that legacy problems have been resolved.
The shares currently trade on a forecast price/earnings ratio of 10, and at a 10% discount to their tangible book value. In my view this cautious valuation should provide decent upside if performance improves.
In the meantime, shareholders should be able to look forward to a forecast dividend yield of 2.7% in 2018, rising to an expected yield of 5% in 2019. RBS remains firmly on my buy list.
Roland Head 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.