Here’s why the RBS share price could be heading for a recovery

With the RBS(LSE: RBS) share price having fallen by 12% since the start of the year, many investors may feel downbeat about the stock’s future prospects. It seems to be unable to spark investor interest, with a general feeling of doom-and-gloom still surrounding the bank due, in part, to its legacy issues.

However, the prospects for the company could be set to improve dramatically and could become a strong income stock over the medium term. Alongside another potential high-yielder that reported encouraging results on Friday, now could be the perfect time to buy the bank for the long run.

Outperformance

The stock releasing news on Friday was pub company Greene King(LSE: GNK). It was able to outperform the wider market over the summer with its like-for-like (LFL) sales rising by 2.8%, versus a 1.2% rise for the industry. This was made possible at least partly because of the company’s focus on efficiency, with it on target to overcome expected inflation costs of £45m-£50m. This could make it more competitive versus rivals at a time when the sector is experiencing an uncertain period due to declining consumer confidence.

With Greene King’s share price having fallen by 16% in the last three months, it’s clearly an unpopular stock among investors. Its price-to-earnings (P/E) ratio of 8.5 suggests that it offers a wide margin of safety, though, and this could mean it has investment appeal despite the risks it faces from a difficult set of operating conditions. As such, and with the company having a dividend yield of 6.9% that’s covered 1.9 times by profit, the long-term recovery potential for the business seems to be high.

Improving outlook

The prospect of a successful turnaround of the RBS share price also seems to be high. The company’s financial outlook has improved so that it’s now expected to post a rise in earnings of 5% per annum in each of the next two years. This indicates that its strategy is gradually having a positive impact on its bottom line, with further growth likely in the coming years as it gradually moves on from the problems associated with the financial crisis.

The bank’s management seems to be confident in the outlook for the company. They’re expected to raise dividends significantly over the next couple of years, with the stock having a forward dividend yield of 5.2% for the 2019 financial year. With dividends expected to be covered 2.2 times by profit next year, there seems to be scope for a further rise over the medium term, which could act as a positive catalyst on the company’s share price.

With RBS having a P/E ratio of 10 at the present time, it seems to have a wide margin of safety versus a number of FTSE 100 peers. Although its share price may have disappointed in recent months, its long-term growth potential seems to be impressive.

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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.

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