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Why the RBS share price is on my FTSE 100 ‘buy’ list for 2019

UK-focused Royal Bank of Scotland Group (LSE: RBS) hasn’t been one of my better tips for 2018. The bank’s shares have fallen by about 25% so far this year, despite the bank settling several historic legal issues and restarting dividend payments.

The stock’s decline can be blamed on Brexit and the risk of a UK recession. But I think it’s also fair to say that 10 years after the financial crisis, many investors are still unsure about banks generally.

I think these concerns may be overdone. Although we can’t know what will happen next year, I’m optimistic about the outlook for RBS. Here are three reasons why I remain a buyer.

1. Problems solved

RBS has had a fair number of legacy problems to solve since the financial crisis. This has taken some time, but the process is largely complete following this year’s $4.9bn (£3.6bn) settlement with the US Department of Justice.

Looking ahead, the firm’s profits should be less affected by legacy issues. This is expected to pave the way for the government to gradually sell its remaining stake in the bank.

2. Dividend restart

This year’s US settlement also led to another important milestone. RBS was able to pay a dividend for the first time since March 2008.

August’s 2p per share interim payout was fairly modest. But analysts expect the dividend to rise rapidly from here on. A total payout of 6.8p per share is expected for 2018, climbing 55% to 10.6p per share in 2019.

These forecasts give RBS stock a 2019 dividend yield of 5%, comfortably ahead of the FTSE 100 average of 4.5%. This payout looks very affordable to me too, as City forecasts indicate that it should be covered 2.6 times by earnings.

3. Cheap at this price

I think the bank’s progress this year has left its shares looking cheaper than they deserve to be.

At the time of writing, RBS shares were trading at 209p. This puts the stock at a 27% discount to its tangible book value of 288p, and gives a forecast price/earnings ratio of 7.5.

This seems too cheap to me, especially given the stock’s growing dividend yield. I continue to hold my shares, and would be happy to buy more.

An unloved dividend bargain?

Another sector that’s unpopular with investors at the moment is public transport. The share price of bus and train operator Stagecoach Group (LSE: SGC) has fallen by 35% over the last two years.

Although some of this decline has been due to weaker profits, I think the stock’s de-rating may have gone too far. Management is taking steps to strengthen the business and today, announced the sale of its US operations for $271m. I estimate this to be about 10 times last year’s operating profit, which seems a fair price to me.

My thoughts

Cash from the US sale will be used to reduce Stagecoach’s net debt of £461m to a more comfortable level. This should make it easier for the firm to invest in new UK opportunities and provide stronger support for the dividend yield of 5.5%.

Stagecoach isn’t out of the woods yet. Earnings are expected to fall again in 2019/20, suggesting further challenges lie ahead.

Despite these risks, I think the stock’s forecast price/earnings ratio of 7 looks good value. Worth a closer look, in my opinion.

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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.