The Motley Fool

Is the RBS share price a bargain or should I buy this dividend-growing mid-cap?

A stock that always appears on my value screens is FTSE 100 bank Royal Bank of Scotland (LSE: RBS). For the past 10 years, shares in the firm have traded below book value as investors have watched the bank try to rebuild itself from the sidelines.

It reached a significant landmark in its recovery last week when, for the first time since the financial crisis, RBS paid a dividend.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Time to buy?

RBS’s return to the dividend club should not be underestimated, in my view.

The fact that management is now confident enough to start distributing retained profits shows that they believe the bank has rebuilt its capital reserves to acceptable levels. What’s more, the reintroduction of the payout indicates that management is optimistic about the future for the enterprise.

Earnings per share (EPS) are forecast to increase by 35% for 2018, followed by growth of just over 5% for 2019. In the years after, there are plenty of tailwinds that could help the bank continue its growth streak. For example, the PPI deadline, and rising interest rates, should lead to more profitable trading conditions in the near term. 

Given this growth outlook, shares in RBS appear to offer good value, trading at a forward P/E of just 9.

And what about the dividend? Well, after its token 2p per share interim payout, analysts are expecting a second final dividend of around 4.5p for 2018, giving a full-year payout of 6.5p. Next year, a full-year distribution of 9.2p is predicted as management ramps up efforts to reward long-suffering shareholders. Based on these predictions, a potential dividend yield of 4.1% is on offer for 2019.

Slow and steady 

RBS looks to offer good value at current levels, but many investors remain cautious about the group’s outlook, due in part to its troubled history. If this puts you off, in my opinion, Arbuthnot Banking (LSE: ARBB) has similar attractive investment qualities.

Shares in Arbuthnot trade at a premium compared to RBS because the company has a stronger record of profitability. Unlike RBS, it’s been consistently profitable for the past six years, and analysts are predicting EPS growth of 33% in 2018, followed by an increase of 55% for 2019.

While these figures do suggest a pricey forward P/E of 23, the stock’s PEG ratio of 0.4 indicates to me that the shares are undervalued, based on Arbuthnot’s growth potential. In a trading update published today, the company confirmed that it’s on track to meet the City’s growth targets for the year.

On top of its growth potential, Arbuthnot has also earned a reputation as a dividend growth stock over the past six years. The payout has grown at a steady 6% per annum since 2012, and with EPS set to leap 33% in 2018, I’m confident this trend will continue. 

With this being the case, now could be the perfect time for dividend growth investors to buy Arbuthnot.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Rupert Hargreaves owns no share 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.