RBS (LSE: RBS) seems to be one of the most hated stocks on the London market. No matter how impressive the company’s results, the path of least resistance for the shares always seems to be down.
The bank’s latest results release is a great example. The group announced its best figures since the financial crisis and a special dividend on top of its regular distribution. However, rather than concentrating on the positives, the market latched onto management’s downbeat forward guidance, which suggested the bank will miss its long term profitability targets due to economic uncertainty.
Underperformance
Following the post results decline, shares in RBS are now off 1% for the year. Year-to-date, shares in the bank are underperforming the FTSE 100 by around 10%, including dividends.
Over the past five years, the stock has underperformed the index by around 14% per annum, and over the past decade, by nearly 20% per annum. Shares in RBS are currently trading at their lowest level in three years.
Looking at this performance, you might assume the bank’s outlook has deteriorated substantially over the past five years. But that’s just not the case. RBS is stronger today than it has been at any other point since the financial crisis.
Indeed, since 2008, the bank has disposed of hundreds of billions of dollars of toxic assets, reinforced its balance sheet and consolidated around its core UK market. RBS’s core equity tier 1 capital ratio — a measure of bank balance sheet strength — was 16% of the end of June, several percentage points above its required minimum.
The robust balance sheet and surging profits mean management has plenty of headroom to return cash to investors. The recently announced interim ordinary dividend of 2p and a special dividend of 12p is evidence of this. These two distributions represent £1.7bn being returned to shareholders in total.
Stronger, but smaller
RBS is stronger today than it was 10 years ago, but it’s also smaller. The group’s tangible net asset value per share is 290p, down substantially from the pre-crisis peak. Profitable banks deserve to trade at, or slightly above, tangible book value, which implies shares in RBS are worth around 290p today, 45% above current levels.
So, the RBS share price appears to be undervalued, but it’s unlikely it will trade back up to 400p anytime soon based on the current figures. That said, if the bank continues to return excess capital to investors via dividends, there’s a good chance shareholders could receive the difference between this 400p price target and the tangible book value in dividends.
The recently announced 14p total distribution is a big step towards this target. With that in mind, if you are looking for an FTSE 100 income stock to include in your portfolio today, it might be worth considering RBS as an investment.
