Indeed, as any Fool knows, a sound investment is more than just buying a stock at a lower price. It’s the result of sound research into a company’s situation and outlook. Which is why it’s worth highlighting three areas of interest to those thinking of buying RBS stock.

RBS is rebranding to NatWest Group

RBS is changing its name to NatWest Group to mark the “start of a new era” for the bank. Understandably, RBS is keen to move on from its association with the 2008 financial crisis and its £45b state bailout. Supposedly, the name change will not alter services for current customers.

However, its loss-making investment banking division, NatWest Markets, is being restructured and streamlined to try and improve profitability. But with foreign exchange gains in 2019 putting more into the bank’s coffers than any other single RBS banking division, I think there’s scope for more to be done elsewhere too.   

62% Royal Bank of Scotland Shares owned by government

That £45b state bailout bought the UK government 82% of the shares of the Royal Bank of Scotland in 2008. Over time, the government has sold part of its holdings and public ownership now accounts for around 62%. It was thought that the government would try to sell its stake by 2023–24. However, the Chancellor has confirmed that the bank will retain its share for at least another year to focus on the coronavirus response.

The problem with this is twofold. Firstly, there is the downward pressure it may have on the RBS share price. The government will sell at some point, the question is when. And secondly, it still leaves the bank subject to direct political interference it may not need or benefit from.

IT risk factors

In the 2019 half-year results, RBS highlighted information technology as a hazard that could impact its operations. Moreover, banks more generally are frustrated by IT failures and cyber-attacks because their networks are hard to protect. However, RBS in particular has a history of security breaches.

More and more of us are banking online, whether for business or personal reasons. Unless RBS manages to improve its cybersecurity, it may start pushing customers towards its more digitally-savvy, lower-cost competitors, reducing revenues.

Royal Bank of Scotland shares are currently trading around 110p. The bank has a tangible net asset value of around 309p and some analysts gave RBS a fair value of 272p back in January. I expect it’s dropped a bit since but it still offers a lot of bank for your money.

However, until the government sells its stake and RBS begins to become more competitive with its peers, I think there are better banks for your money.     

The post 3 things you need to know about Royal Bank of Scotland shares appeared first on The Motley Fool UK.

More reading

• Here’s how FTSE 100 stocks could help an investor double their State Pension with a £25,150 annual income
• Is the stock market correction a once-in-a-decade chance to target a million-pound SIPP?
• Check out today’s eye-popping Barclays, Lloyds and NatWest share price and dividend forecasts 
• Investors are rushing to buy these before the Stocks and Shares ISA deadline. Should we join in?
• Lists of income stocks to buy almost never include this one — but with a forecast 8.2% yield, I think they should!

Rachael FitzGerald-Finch 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.

The turnaround has been 12 years in the making, but I think that banks have finally won back the public’s trust – mostly. 

But what about investing in banks? What about shares in HSBC Holdings or Lloyds Banking Group, for example? What about Barclays and Royal Bank of Scotland Group shares? Have they become more attractive too?

The share prices

Most of the banks have suffered especially acute falls in their share price this year.

The FTSE 100 has fallen by just over a quarter since the beginning of the year, but shares in Lloyds, on the other hand, have halved. It has been a similar story with Barclays  shares, while the RBS share price has more than halved — from 244p to 114p.  For HSBC shares it’s been tough but not quite so bad. Its shares have fallen by slightly less than a quarter.

At face value that feels almost ironic. Shares in the bank that is famous for its links with China has performed much more strongly than the more UK-centric banks. But if you look a little more carefully at HSBC shares compared with shares in Lloyds, Barclays, and RBS, you will see a slight difference in timing. The HSBC share price started to fall a little sooner and has seen a mild recovery, roughly coinciding with with signs that the Covid-19 virus was spreading less quickly in China.

Lower share price means higher dividends 

The recent falls in shares pertaining to the four banks has meant the yield has improved — assuming that dividends are maintained. The HSBC dividend yield is now just under 9%. Lloyds dividends are over 10%. RBS dividends are lower at just under 4%, but then the bank has only recently started paying dividends. The Barclays dividend yield sits roughly between the HSBC and Lloyds yield.

With interest rates so low, I would be tempted to say these yields are very attractive.

There is one big question mark hovering, however. Will dividends be maintained?

We just don’t know how weak the economy will be in the post-Covid-19 era. Suppose house prices crash. A significant part of Lloyds’ revenue is from mortgage lending, so how would falling house prices affect it?

Then there is the possibility of a debt bubble. If the economy falls into some kind of depression, might indebted households default in big numbers?

On the other hand, partly thanks to international regulations imposed to reduce banks’ vulnerability in the event of another financial crash, banks have much stronger balance sheets today compared to 2008.

I hate to tempt fate by saying this, but I think that the banks are highly unlikely to need a bailout this time around.

We will always need banks, and after certain teething problems, they have all learned how to adopt digital technology. I think that shares in HSBC, Lloyds, and Barclays are appealing, right now. As for RBS shares, I am not so sure — this crisis is not good timing.

The post Investing in the Covid-19 era – I think bank shares are looking attractive appeared first on The Motley Fool UK.

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Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.

In this article, I’ll discuss why its shares soared, and give my view on its current valuation and prospects.

Volatile

To begin with, it’s worth noting that RBS’s September performance followed a poor showing in August. Its shares slumped 15% that month, compared with a 5% drop for the FTSE 100, and it was the worst performer among the banks.

As August and September have shown, RBS tends to be more sensitive than its peers to changes in sentiment in the wider market. However, having acknowledged the share price is prone to volatility, let’s turn to the more concrete matter of company news.

PPI crescendo

The catalyst for RBS’s poor performance in August was its half-year results at the start of the month in which it revealed it’s “very unlikely” to achieve its 2020 financial targets “given current market conditions, continued economic and political uncertainty and the contraction of the yield curve.”

On the face of it, news in early September continued to be negative. RBS reported that the volume of PPI claims ahead of the 29 August deadline had been “significantly higher than expected,” and that it would be making an additional provision of between £600m and £900m.

Other banks made similar statements, but the market shrugged off the news across the sector. Maybe it was simply the end of the uncertainty of the long-running saga around PPI that kept share prices ticking up, or maybe market participants felt that many of the claims in the huge August spike would prove spurious, and that the banks had (for once) over-provisioned.

Analysts and Alison

The market also shrugged off several somewhat negative analyst releases on RBS over the first half of the month. The most severe came from Deutsche on 6 September. It downgraded the stock to ‘hold’ from ‘buy’, and slashed its price target to 215p from 290p.

RBS’s shares continued to march upwards, and on 20 September reached a month high of 213.5p (15% up from the end of August). This peak came on the day the company named its new chief executive as Alison Rose, almost five months after incumbent Ross McEwan announced his intention to depart. So, this was another outstanding uncertainty put to bed.

The share price eased back a little in the latter days of September, but still ended the month with the aforementioned healthy 12% gain at 207.6p.

Cyclical risk

It’s looking like October’s going to be another volatile month, ahead of the Brexit deadline, with the FTSE 100 plunging 3.2% yesterday — its biggest drop since before the Brexit vote — and RBS’s shares falling back below 200p.

However, I’m less concerned about sentiment and volatility than the risk that, whatever the Brexit outcome, we’re a lot nearer today than at any time in the last 10 years to the next cyclical downturn in the economy.

Personally, I don’t quite see a big enough margin of safety in RBS’s current share price to protect me against earnings and dividend forecasts evaporating in a recession scenario. As such, I’m content to avoid the stock at this stage.

The post Why the RBS share price rose 12% in September appeared first on The Motley Fool UK.

More reading

• Here’s how FTSE 100 stocks could help an investor double their State Pension with a £25,150 annual income
• Is the stock market correction a once-in-a-decade chance to target a million-pound SIPP?
• Check out today’s eye-popping Barclays, Lloyds and NatWest share price and dividend forecasts 
• Investors are rushing to buy these before the Stocks and Shares ISA deadline. Should we join in?
• Lists of income stocks to buy almost never include this one — but with a forecast 8.2% yield, I think they should!

G A Chester 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.

With this in mind, I believe Royal Bank of Scotland (LSE: RBS) is a stock to avoid, but rate insurer Prudential (LSE: PRU), which released its half-year results today, as a ‘buy’. Here, I’ll explain why exactly I have a negative view on RBS and a positive view on Prudential.

Pedestrian

It seems that just as RBS is getting back on its feet after 10 years of financial surgery, it’s set to be pummelled by a fresh wave of body blows. In its half-year results earlier this month, it advised that it’s now “very unlikely” to hits its 2020 targets of 50% cost:income ratio and 12% return on tangible equity. It said this is due to “current market conditions, continued economic and political uncertainty and the contraction of the yield curve.”

Since then, we’ve had government figures showing the UK economy contracted by 0.2% between April and June. This is the first quarterly contraction in seven years, and raises the spectre of the UK entering a recession — two successive quarters of negative growth —  before Brexit’s even happened.

Banks are highly geared to the performance of the wider economy, and with RBS being domestically focused, a UK recession would hit it hard. Looking to the longer term, the UK is likely to be a lower-growth economy anyway. And with the FTSE 100 containing many geographically diversified businesses, with exposure to higher-growth markets around the world, I think RBS is poorly placed to deliver a higher long-term return than a simple FTSE 100 tracker.

Sure, a share price of 202p gives a low forward price-to-earnings (P/E) ratio of 7.4. But that’s what I’d expect for a highly cyclical business, with what I view as a tough near-term outlook and long-term prospects of only pedestrian growth.

Smashing

Prudential’s P/E isn’t quite as low as RBS’s, but in single-digits at 9.3 is still cheap by historical standards. Moreover, I think its plan to de-merge part of its business will unlock value for shareholders in the near term, while in the longer term, its geographical positioning makes it well placed to smash the return of the FTSE 100.

Prudential intends to de-merge its M&GPrudential business and list it on the London Stock Exchange as a separate company (M&G plc) in the fourth quarter of this year. After the split, existing investors will own shares in both firms. I rate the stock a buy today, because I think the valuation implied by the current share price of 1,460p, will move closer — after the separation — to a sum-of-the-parts valuation of 2,000p.

John Foley, chief executive of M&G, which is carried in Prudential’s results today as a discontinued operation, reckons M&G’s in “great shape to use the freedom of de-merger … to grow this business at scale.”

Meanwhile, Prudential will have valuable American operations and a fast-growing franchise in Asia, where there’s a terrific long-term growth story for its life insurance and other financial products. Indeed, the group today reported a 14% rise in operating profit in both the US and Asia. As such, I see considerably more long-term growth potential in Prudential than RBS.

The post Forget the RBS share price. I’d back this other blue-chip to smash the FTSE 100 appeared first on The Motley Fool UK.

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• Check out today’s eye-popping Barclays, Lloyds and NatWest share price and dividend forecasts 
• Investors are rushing to buy these before the Stocks and Shares ISA deadline. Should we join in?
• Lists of income stocks to buy almost never include this one — but with a forecast 8.2% yield, I think they should!

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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.

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.

The post The RBS share price: what’s next? appeared first on The Motley Fool UK.

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• Is the stock market correction a once-in-a-decade chance to target a million-pound SIPP?
• Check out today’s eye-popping Barclays, Lloyds and NatWest share price and dividend forecasts 
• Investors are rushing to buy these before the Stocks and Shares ISA deadline. Should we join in?
• Lists of income stocks to buy almost never include this one — but with a forecast 8.2% yield, I think they should!

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.

Furthermore, the bank has plans to raise dividends rapidly over the medium term. Alongside another cheap stock that released results on Wednesday, now could be the right time to buy it.

Improving prospects

The stock in question is gold miner Centamin (LSE: CEY). Its first-quarter results showed that it beat production expectations, recording production of 116,183 ounces of gold versus a forecast of between 105,000 and 115,000 ounces. The company has also delivered further operational improvements in the open pit and underground, while its costs are trending towards the lower end of its annual guidance.

Centamin has reiterated its guidance for 2019, with gold production expected to be between 490,000 and 520,000 ounces. Cash costs are forecast to be between $675 and $725 per ounce. This is due to lead to a rise in earnings of 20% versus the previous year.

With the stock trading on a price-to-earnings (P/E) ratio of around 10, it seems to me to offer good value for money. Since the pace of interest rate rises in the US may be slower than previously expected due to mixed economic data, and there being continued risks facing the world economy, the gold price may enjoy a tailwind over the medium term. As such, gold miners may become increasingly popular among investors, which could lead to higher returns for their shareholders.

Low valuation

As mentioned, the last year has been challenging for the RBS share price. Uncertainty regarding the prospects for the UK economy has meant that investors have been increasingly cautious towards the bank’s shares, despite continued improvements in its performance.

Evidence of the improving outlook for the business can be seen in its plans to raise dividends at a rapid pace over the medium term. Having recommenced dividends last year after a hiatus following the financial crisis, RBS is expected to increase them by 130% in the current year. This puts it on a forward dividend yield of 4.9%, while dividend cover of 2.2 suggests that there is scope for further growth in shareholder payouts over the long run.

Although the operating environment may remain uncertain for RBS, its bottom line is due to rise by 5% in the current year. Given that it trades on a P/E ratio of just 9, it could offer good value for money when compared to a number of its FTSE 100 index peers. Therefore, while there may be some way to go until it returns to full health after what has been a challenging decade, its long-term prospects could continue to improve.

The post Here’s why I’d buy the RBS share price right this minute appeared first on The Motley Fool UK.

More reading

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• Is the stock market correction a once-in-a-decade chance to target a million-pound SIPP?
• Check out today’s eye-popping Barclays, Lloyds and NatWest share price and dividend forecasts 
• Investors are rushing to buy these before the Stocks and Shares ISA deadline. Should we join in?
• Lists of income stocks to buy almost never include this one — but with a forecast 8.2% yield, I think they should!

Peter Stephens owns shares of Centamin and 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.

The RBS share price has performed strongly this year and market sentiment is improving. In this piece I’ll explain why I’m holding onto my shares. Plus I’ll look at a fast-growing small-cap financial firm that’s just released some attractive numbers.

One big number

One remaining hurdle for RBS is that the UK government still owns 62% of the bank’s stock. This £20bn shareholding means that the government may have some influence over the bank’s activities and strategy.

Another concern is that we know the government wants to sell by 2024. This means there is a big ‘overhang’ of stock that will need to be sold into the market. If demand isn’t strong enough, this could depress the bank’s share price.

RBS is trying to address these concerns by offering to buy back some of the government’s shares. It’s gained shareholder approval to buy back up to 4.99% of its shares each year — about £1.6bn at current prices.

The timing of government share sales is uncertain, but I believe a buyback of this kind would be good news for shareholders.

Outlook is improving

RBS shares have risen by 26% so far in 2019, reversing the falls seen during the final quarter of last year. After a strong set of annual results in February, investors seem to be gaining confidence. Earnings forecasts for the current year have been rising and the stock’s discount to its book value is disappearing fast.

Last year’s results confirmed that the bank’s profitability is improving. RBS stock now trades on 9.5 times 2019 forecast earnings and offers a 4.6% yield. For long-term income investors, I believe this could be a good buying opportunity.

Dividends + growth from this small cap

Another financial stock I’m keen on is small-cap fund manager Miton Group (LSE: MGR). Shares in the firm are up by 13% at 59p at the time of writing after the group’s 2018 results came in significantly ahead of expectations.

Earnings for last year came in at 4.7p per share, nearly 15% ahead of analyst’s forecasts. The group’s 2018 dividend of 2p per share also beat forecasts for a payout of just 1.76p per share.

Cash inflows boost results

This specialist firm has a good track record of performance. At the end of 2018, 81% of its funds were in the top 50% of the market, in terms of their performance against rivals.

Customers appear to be keen to add more of their cash to the group’s funds. Net inflows rose to £1,019m in 2018, more than double the figure for 2017. This left the group’s total assets under management (AuM) up by £553m to £4,376m.

Although some of the firm’s funds were hit by the market sell-off at the end of last year, this was true across the market. In my view, it doesn’t detract from Miton’s strong track record.

I expect analysts’ forecasts for 2019 to be upgraded following today’s results. Although the group’s performance is dependent on wider market conditions, I see this as one of the best options in the fund management sector.

Miton shares now yield 3.4%, providing a useful income for patient shareholders. I remain a buyer.

The post This is what I’d do about the RBS share price right now appeared first on The Motley Fool UK.

More reading

• Here’s how FTSE 100 stocks could help an investor double their State Pension with a £25,150 annual income
• Is the stock market correction a once-in-a-decade chance to target a million-pound SIPP?
• Check out today’s eye-popping Barclays, Lloyds and NatWest share price and dividend forecasts 
• Investors are rushing to buy these before the Stocks and Shares ISA deadline. Should we join in?
• Lists of income stocks to buy almost never include this one — but with a forecast 8.2% yield, I think they should!

Roland Head owns shares of Miton Group and 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.

With RBS set to increase dividends over the medium term, now could be the right time to buy it. Alongside another dividend growth stock that released an update on Thursday, it could deliver an impressive income return in the long run.

Improving outlook

The company in question is home improvement and home building products supplier Marshalls (LSE: MSLH). Its full-year results showed that it has been able to perform well despite challenging trading conditions. Revenue increased by 14% to £491m, while pre-tax profit moved 21% higher to £62.9m. Its return on capital employed improved by 110 basis points to 21.9%, while strong cash generation has continued.

The company’s self-help programme appears to be making a real impact on its financial performance. It is focused on innovation, with increases in R&D expenditure set to lead to new products that could drive sales higher.

While Marshalls has a dividend yield of just 2.6%, its dividend growth potential seems to be high. In the last five years, dividends per share have risen at an annualised rate of 25%. With dividend payments due to be covered 1.8 times by profit, there could be scope for continued dividend growth over the medium term. As such, the stock could become an impressive income opportunity, with its share price performance having the potential to be positively catalysed by a rising dividend.

Growth potential

As mentioned, RBS could become an increasingly appealing income share. The company has experienced a challenging recent past, with it still not having returned to full financial health following the financial crisis. This shows just how dire its prospects were a decade ago, and it is likely to take a number of years for it to move away from the effects of the credit crunch.

However, the bank’s management appears to be confident in its ability to achieve improving performance. It has restarted dividends, with the stock expected to yield 4.8% in the current year. This figure has been boosted by a falling RBS share price, the bank having been relatively unpopular among investors in the last year as the prospects for the UK economy have become increasingly uncertain.

Looking ahead, Brexit could disrupt the company’s near-term prospects. However, with factors such as a rising interest rate and the expected reduction in PPI claims likely to have a positive impact on its performance, dividend growth could be impressive. The RBS dividend for 2019 is due to be covered 2.2 times by profit, which suggests that it is able to afford a much higher shareholder payout. This could lead to a strong income return in the long run which makes the stock more appealing than buy-to-let properties.

The post Why I’d dump buy-to-let and buy into the RBS share price today appeared first on The Motley Fool UK.

More reading

• Here’s how FTSE 100 stocks could help an investor double their State Pension with a £25,150 annual income
• Is the stock market correction a once-in-a-decade chance to target a million-pound SIPP?
• Check out today’s eye-popping Barclays, Lloyds and NatWest share price and dividend forecasts 
• Investors are rushing to buy these before the Stocks and Shares ISA deadline. Should we join in?
• Lists of income stocks to buy almost never include this one — but with a forecast 8.2% yield, I think they should!

Peter Stephens 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.

In this article, I’ll explain why I think the shares are cheap at current levels, and why I expect them to beat the market over the next couple of years.

Dividend bigger than expected

Friday’s figures revealed that shareholders will get a much bigger payout than expected for 2018. The bank will pay a final dividend of 3.5p per share and a special dividend of 7.5p per share. Together with the 2018 interim dividend of 2p per share, this gives a total payout of 13p per share for 2018. That’s equivalent to a yield of 5.2% at the last-seen share price of 247p.

This generous payout was made possibly because the group’s pre-tax profit rose by 50% to £3,359m, slightly ahead of analysts’ forecasts. Although the group’s revenue only rose by 2% to £13.4bn, costs fell by £756m and bad debts of £398m were 19% lower than in 2017.

These changes combined to help increase the bank’s return on tangible equity — a key measure of profitability — from 2.2% to 4.8%. Although this is still too low, it’s a solid improvement and a step towards its 2020 target of at least 12%.

My target price is 325p

As a shareholder, I’m pleased with the progress made this year. But I’m hoping for more. At the heart of my valuation model is the assumption that this bank (and others) will be able to return to more sustainable levels of profitability.

The role model here is Lloyds Banking Group, which reported a return on tangible equity of 13% for the first nine months of 2018. RBS is obviously some way below this at the moment, but Lloyds’ performance suggests to me that the RBS target of “more than 12%” by 2020 may be achievable.

At the moment, RBS shares trade at a 15% discount to their tangible net asset value of 286p per share. In contrast, Lloyds’ shares trade at a 10% premium to tangible net asset value.

If RBS shares were valued at the same level as Lloyds’, my sums suggests the RBS share price could rise to about 325p. That’s about 30% above the current share price.

What happens next?

The government still has a 62.4% stake in RBS. The Treasury sold 7.7% of the bank’s shares last June but, since then, there’s been no word on the timing of any further sales. Some analysts have suggested today’s results — earlier than expected — may be a sign that the government is gearing up to sell more stock.

I’d welcome this but I don’t know how likely it is. What I do know is that RBS chief executive Ross McEwan seems to be doing all the right things. The only remaining concern is the possible impact of Brexit. McEwan sounded a cautious note on this on Friday, warning that bad debts could rise this year.

I don’t know what will happen next. But RBS shares offer a 2019 forecast dividend yield of 4.5%, and the bank’s performance is improving. I continue to rate the shares as a buy.

The post Have £1k to invest? I think the RBS share price could crush the FTSE 100 this year appeared first on The Motley Fool UK.

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• Here’s how FTSE 100 stocks could help an investor double their State Pension with a £25,150 annual income
• Is the stock market correction a once-in-a-decade chance to target a million-pound SIPP?
• Check out today’s eye-popping Barclays, Lloyds and NatWest share price and dividend forecasts 
• Investors are rushing to buy these before the Stocks and Shares ISA deadline. Should we join in?
• Lists of income stocks to buy almost never include this one — but with a forecast 8.2% yield, I think they should!

Roland Head owns shares of Royal Bank of Scotland Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Despite this, the stock could offer investment appeal over the long run. It has an improving financial outlook, with its dividend expected to increase over the next few years. And since it trades on a low valuation, it may offer impressive investing appeal relative to the FTSE 100.

Of course, it’s not the only stock which could be worth a closer look. Reporting on Monday was a small-cap share which could generate impressive investment performance, in my opinion.

Improving prospects

The company in question is digital services and platforms provider Kainos (LSE: KNOS). It released a trading update for the period from 26 November to date that reflects strong momentum within its core markets. Its performance for the 2019 financial year is also expected to be ahead of previous guidance.

Notably, the company has been able to deliver strong growth in its Digital Services division, which is benefitting from high demand. Meanwhile, the Digital Platforms segment has also been able to see growth in line with previous expectations.

Looking ahead, Kainos is forecast to post a 27% rise in net profit in the current year, followed by further growth of 13% next year. Since the stock has a price-to-earnings growth (PEG) ratio of just 1.2, it appears to offer a margin of safety. As such, now could be a good time to buy ahead of what may prove to be a period of strong performance for the business.

Turnaround potential

As mentioned, RBS faces a number of risks which could hold back its share price performance in the near term. Brexit is yet to reach its conclusion and this could lead to investors pricing in a margin of safety for companies with exposure to the UK economy. Furthermore, risks facing the world economy from a rising US interest rate and a weakening trading relationship between the US and China may cause a continued shift towards risk aversion among investors.

However, the prospects for RBS continue to improve. Under its current management team, the business has been able to grow its bottom line, and further growth of 5% is expected in the current year. The end of PPI claims later this year could mean that the wider banking sector is under less pressure over the medium term. And with the stock trading on a price-to-earnings (P/E) ratio of 8.8, it appears to offer a margin of safety, versus a number of other FTSE 100 stocks.

Since RBS is expected to increase dividends this year so that it yields over 5%, it could become an increasingly appealing income share. With shareholder payouts due to be covered 2.2 times by profit, there could be scope for further dividend growth over the medium term.

The post Why I think the RBS share price is a dirt-cheap FTSE 100 dividend-investing opportunity appeared first on The Motley Fool UK.

More reading

• Here’s how FTSE 100 stocks could help an investor double their State Pension with a £25,150 annual income
• Is the stock market correction a once-in-a-decade chance to target a million-pound SIPP?
• Check out today’s eye-popping Barclays, Lloyds and NatWest share price and dividend forecasts 
• Investors are rushing to buy these before the Stocks and Shares ISA deadline. Should we join in?
• Lists of income stocks to buy almost never include this one — but with a forecast 8.2% yield, I think they should!

Peter Stephens 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.