The RBS share price isn't the only FTSE 100 value stock I'd buy today

A bull outlined against a field

Today I want to look at two value stocks from the FTSE 100. One is a share I already own and the second is a share I'd be happy to buy today.

In my view both stocks offer opportunities for contrarian investors at today's prices.

The turnaround is here

Royal Bank of Scotland Group (LSE: RBS) has taken a long time to return to profit. But after last year's results I'm convinced the tide is turning. This eternal value stock may be about to come good.

Friday's first-quarter update showed that operating profit rose by 70% to £1,213m, as costs fell. Return on tangible equity rose to 9.3%, compared to 3.1% for the same period last year.

Cash generation remains strong and the group's common equity tier 1 ratio (CET1) rose by a further 0.5% to 16.4%, leaving it well ahead of the 13% minimum targeted by the bank. This should be good news for dividend investors, as it indicates the bank is generating surplus cash.

The only catch is that RBS hasn't yet agreed a final settlement with the US Department of Justice relating to the alleged mis-selling of mortgage-backed securities. This is expected to result in a hefty fine and could put a dent in this year's results.

Time to buy more?

Although this ongoing case represents a risk, it should be a one-off hit. Once this is out of the way, the government is expected to start selling down its 70%+ shareholding in the bank.

The shares currently trade on a forecast P/E of 10.5 and with a prospective yield of 2.7% for 2018. A dividend increase of 83% is pencilled in for 2019, giving a forecast yield of 4.9%. I believe now is the ideal time to start buying RBS for a long-term dividend income.

A 7% yield from the FTSE 100

Direct Line Insurance Group (LSE: DLG) was floated on the London Stock Exchange in 2012, since when its share price has risen by more than 120%. Alongside this impressive gain, shareholders have also enjoyed a rising stream of dividends.

Profits were hit in 2016 by changes to the way in which compensation payouts were calculated, but the impact of this reversed in 2017. As a result, profits rose sharply last year. Pre-tax profit climbed 52.7% to £539m, while the group's return on tangible equity increased from 14.2% to 21.7%.

Watch out for bad weather

Last year's gains were helped by a fall in the group's combined operating ratio, which dropped from 97.7% to 91.8%. This ratio compares claims costs and operating expenses with the total amount received in premiums. A figure of less than 100% indicates that a company's underwriting is profitable.

Snow and ice usually generates a surge of claims, so claim losses may have been higher than usual during the first quarter of this year. But I don't expect this to have too much impact on full-year results, based on comments made by other insurers.

I'd buy today

Consensus forecasts suggest that Direct Line's profits will be broadly flat this year. Analysts expect adjusted earnings of 32.2p per share, versus a figure of 33.6p per share last year. A total dividend of 27.6p per share is forecast, including a special payout.

These figures put the stock on a forecast P/E of 11.5 with a prospective yield of 7.5%. I'd rate this as a buy.

Buy-And-Hold Investing

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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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