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The RBS share price: what’s next?

The Royal Bank of Scotland Group (LSE: RBS) has lagged the market over the last year, falling 23% compared to a 7% drop for the FTSE 100.

I think investors’ lack of love for the UK bank may have gone too far. Here, I’ll explain why I remain a buyer. I’ll also look at a major airline stock that’s currently out of favour.

The RBS 6% yield

It’s been a long while since Royal Bank of Scotland shares offered investors a 6% dividend yield. But the latest market forecasts suggest shareholders will receive a payout of 14.2p per share this year, giving a forecast yield of about 6.2%.

This dividend looks fairly safe to me. It should be covered 1.9 times by forecast earnings of 26.2p per share and backed by the bank’s strong balance sheet.

What else is good?

But its dividend isn’t the only attraction. In terms of valuation, the shares trade at a 22% discount to their net tangible asset value of 286p per share. That suggests a reasonable margin of safety, in my view.

Meanwhile, the bank’s profitability improved last year. Underlying return on tangible equity rising to 4.8%, compared to 2.2% one year earlier. Although this is still well below RBS’s medium-term target of 12%, I think it represents good progress.

Problems ahead?

Guidance for the year ahead is cautious. The bank expects an increase in bad debt levels and management remains concerned about the impact of Brexit uncertainty on the economy.

Another risk is that chief executive Ross McEwan has resigned. He remains in the post but the bank hasn’t yet appointed a replacement, so strategic progress could slow.

However, these risks are already known and understood by the market. In my view, the current share price represents a good long-term buying opportunity. I hold the shares and would be happy to buy more.

Too soon for this flyer?

Shares in Irish airline Ryanair Holdings (LSE: RYA) fell today after the budget flyer said full-year profits fell 29% to €1.02bn during the year to 31 March. Today’s figures contained a mix of good and bad news, in my opinion.

The good news was that by cutting fares, the airline is still able to fill seats despite adding capacity. More than 139m passengers flew Ryanair last year, a 7% increase from 130m in 2018. The airlines sold 96% of available seats, up from 95% in 2018.

The bad news is that Ryanair had to keep cutting ticket prices despite a sharp rise in costs. This suggests to me the airline doesn’t have much pricing power at the moment. This may mean there’s too much capacity on some short-haul European routes.

Is now the time to buy?

Ryanair’s cash generation remains strong and profits are expected to be flat this year. But this guidance depends on the firm managing to increase total revenue per passenger by 3%.

In the meantime, fuel costs are expected to climb by another €460m. Delivery of more fuel efficient Boeing 737-MAX aircraft has been postponed due to the grounding of this model.

Ryanair shares have fallen by more than 40% from their 2017 peak of about €18. They now trade on about 12 times forecast earnings. Although that seems reasonable, I suspect profits could have a little further to fall. I wouldn’t rush to buy. I think the shares could still get cheaper.

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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.