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Can you trust the RBS share price’s 6.5% dividend yield?

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Profits rose sharply last year at Royal Bank of Scotland Group (LSE: RBS), but the results have sent the share price down today. What’s going on?

I’ve been looking at the bank’s 2019 results and its guidance for 2020. Today I’ll explain what I think is happening, and why I remain a buyer of RBS shares.

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RBS becomes NatWest Group

Chief executive Alison Rose announced today that she plans to change the name of the group’s parent company from Royal Bank of Scotland Group to NatWest Group.

High street customers won’t see any change, but the group’s stock listing will be renamed later this year. I think the idea is to give the bank a new image that’s not so closely associated with its financial crisis bailout and the scandals that followed.

I guess there’s no harm in it, but what really matters is financial performance. Let’s take a closer look.

Profits doubled in 2019

Last year wasn’t all that bad for RBS. The bank’s underlying net profit rose by 93% to £3,133m, beating City forecasts. The underlying return on tangible equity increased from 4.8% to 9.4%, demonstrating improved profitability. Lower costs helped to offset a reduction in profit margins on mortgages and loans.

It’s the same kind of story I’m seeing at most of the big UK banks. Top-line growth is minimal, but costs are falling and misconduct charges are lower. This is helping to rebuild profitability and provide sustainable dividends.

On the dividend front, RBS shareholders did pretty well in 2019. In total, the firm expects to pay an ordinary dividend of 5p per share for the year, plus special dividends totalling 17p per share. This will give a total payout of 22p for the year, which is equivalent to a 10.3% yield at today’s share price.

However, this payout was boosted by the sale of a part-owned Saudi Arabian bank. City analysts are forecasting a lower payout of 13.9p per share next year, giving a forecast yield of 6.5%.

A business with purpose

RBS used Friday’s results to reveal an updated strategy. CEO Ms Rose says that the company will become a more “purpose-led organisation”. Changes planned include shrinking the group’s investment banking operation and improving support for smaller businesses. RBS also promises to cut the carbon emissions associated with its lending activities.

These sound like worthwhile aims to me, but unfortunately they won’t help the ongoing pressure on profit margins. RBS now expects to generate a return on tangible equity of between 9% and 11% each year over the medium term, down from previous guidance of “more than 12%”.

Is the dividend safe in 2020?

Ms Rose expects 2020 to be another tough year, with pressure on profit margins and some restructuring costs. So is the dividend safe?

My sums suggest that the ordinary dividend for 2020 is likely to be around 9p, based on the company’s existing payout policy. That’s some way below the broker forecasts for 13.9p which I mentioned earlier.

However, the bank’s latest accounts suggest to me that RBS is still carrying some spare capital. I’d expect some of this to be returned to shareholders in 2020, boosting the dividend payout.

On balance, I think shareholders buying at current levels should be able to expect a payout of at least 6% this year. I continue to see RBS as a long-term buy.

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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.

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