Here’s how the RBS share price could help you beat the State Pension
There was a time when banking was considered a thoroughly reputable business and shares in banks were thought of as among the most solid investments you could make for your pension. Oh what a difference a decade makes.
Sir Howard Davies, chairman of Royal Bank of Scotland(LSE: RBS), has this week spoken of the near certainty that the government is set to make a big loss on its £45bn bailout of the bank in the depths of the crisis.
Huge losses
RBS has lost almost £130bn in the 10 years since its rescue, and its lowly share price values the entire bank at just £30bn. Sir Howard pointed out that the cash injection wasn’t intended as an investment but as a means to save the UK financial system from collapse. He’s right, of course, and it’s a pain we had to endure to prevent far worse hardship.
But is the taxpayers’ loss an investors’ gain? I think so. RBS has incurred restructuring costs of £15bn and has had to sell off chunks of its business to satisfy EC requirements covering state aid. But what’s left is starting to look like a tempting prospect to me.
I’ve always placed RBS behind Lloyds Banking Group in the desirability stakes, essentially because of its considerably slower return to health. Lloyds, for example, has been back to paying dividends for several years now, and as a shareholder I’m happily looking forward to seeing my yields rise to 6% over the next couple of years.
Dividends
RBS, by comparison, still hasn’t managed to pay out a penny. But that is changing, as in August the bank declared an interim dividend of 2p per share. The full-year yield is currently estimated at around 2.7%, which isn’t spectacular. But it would beat Lloyds’ first post-recovery yield of just 1%, and is predicted to rise to 5% next year.
Liquidity looks fine these days, with all the UK’s banks coming comfortably through the Bank of England’s most recent stress tests.
But a look at the valuation of RBS shares shows clearly that not all is well in the minds of investors.
We’re looking at a forward P/E ratio of only nine, when an average FTSE 100 company paying average dividends would typically command a multiple of around 14. And with a 5% yield looking likely next year, something higher than that might be justified.
But RBS still faces problems, among which are the continuing costs of the PPI mis-selling scandal, coupled with various regulatory and legal charges. PPI pain will be coming to an end in August next year, but until it’s truly over, the uncertainty will surely keep institutional investors away.
Fear
And that brings me to what I see as a major factor in the RBS share price — it’s that very uncertainty, which is one of the things that big City investors dislike the most. Being cautious over the potential downside of an investment is sound practice, of course, favoured by none other than Warren Buffett himself.
But I see the fear as overdone. The big firms are more interested in their performances per quarter, but I see an opportunity here for private investors with a long-term view of their pension investments to put that advantage to work.
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Alan Oscroft owns shares of Lloyds Banking 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.
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