Out of the five FTSE 100 banks, the Royal Bank of Scotland (LSE: RBS) was the top performer last month. An impressive 12% rise in share price was miles ahead of the index’s gain of 3%. So, what does this mean? Is it worth jumping on the investment train now?
I think so and I believe that the future is also very bright for the bank.
A rocky past
It hasn’t all been rosy for RBS as disappointing August half-year results had the share price plummeting 15% in one month. I think that RBS can be slightly more sensitive than other stocks to concerns about the UK economy and Brexit. However, I don’t believe this should make the stock unattractive.
RBS is very attractive to me as a long-term investment that could bring some great rewards. Despite a rise in share price, the RBS is still valued low with a price-to-earnings of just 8. The low-valuation of shares used to be down to the lack of a dividend and loss-making performance. However, RBS is currently offering an attractive dividend yield of 2.7%.
On top of this, the 2020 dividend is predicted to yield 6.8%. This is a huge rise and makes the investment now worth it for me. With a higher dividend yield, the share price is likely to rise along with it, so I’d buy now. The predicted dividend cover is expected to be 1.8 times next year. This is a high enough margin of safety to make it worth it for my portfolio.
A volatile market
With economic uncertainty rife in the UK and Brexit concerns, any banking company is going to be up and down in the next few months. However, RBS has made tremendous progress in the past few years in an effort to rebuild its balance sheet. Profits have managed to recover more than £3bn despite uncertainty.
Understandably, forecasts and valuations for all UK banks are on the low end due to Brexit. This just leads me to believe that RBS is currently undervalued and could rise dramatically next year. The bank’s performance has been strong and continues to recover despite the odds being against it.
In the next 12 months, analysts are predicting a 133% increase in the current trading of shares. Alison Rose is set to be the new CEO of RBS in November, helping to navigate the bank post-Brexit. She has been described as having a “sure touch” and many are confident in her leading the bank toward success.
If patient investors are looking for a great income stock, I believe that RBS will reap huge rewards. This is a stock that I’d consider a long-term investment that could result in regular, high-paying dividends. You just have to be willing to sit back, relax, and wait to see the stock recover fully.
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fional has no position in any of the shares 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.