Royal Bank of Scotland (RBS) has announced plans to pay its first dividend of 2 pence per share since the financial crises. The official timing and details of this payment will be finalized when the agreement regarding a fine from the U S Department of Justice, with respect to an ongoing investigation relating to the banks role in the subprime crises, is concluded.
The UK government sold 7.7% stake in RBS in June, reducing its ownership of the bank it bailed out in 2008 to around 62.4% (From 70.1%).
The major key takeaways from RBS’s announcement were as follows:
- Intention to declare a 2p interim dividend, building a dividend payout ratio of 40% over time (suggesting the increased importance of income generation from the stock)
- H1 Profit before tax of £1.8 billion with attributable profit of £888 million
- Operating profit before tax was £613 million in Q2 compared with £1.2 billion in the same period last year.
- Shift from physical to digital banking underwat(Cheque usage down 16%, Branch counter transactions down 7%, Contact Centre calls down 11%, Mobile payments up 26%)
The company also announced that it is on track with its financial targets for 2020. Highlights below:
The bank’s Return on Tangible Common Equity (ROTE) is expected to increase by 12%. Measuring a company's Tangible Common Equity (TCE) is particularly useful for evaluating companies that have large amounts of preferred stock, such as RBS, that received UK government bailout money following the 2008 financial crisis. In exchange for bailout funds, those banks issued large numbers of shares of preferred stock to the federal government. A bank can boost TCE by converting preferred shares to common shares, something which RBS is planning to do overtime.
The bank is also expecting to lower the cost income ratio to 50% (it currently stands at 70%). The cost-to-income ratio is the measure of the costs of running a company in relation to its operating income. It is an important financial tool, particularly when evaluating banks. The ratio gives investors a clear view of how efficiently the company is being run – the lower the cost to income ratio is, the more profitable it should be.
What does this all mean for the shareholders?
The reinstatement of the dividend will not only give existing shareholders some confidence but will also increase liquidity in the stock, as large number of income-oriented fund managers will again start considering this stock which was previously omitted. All this interest will therefore make it easier to the government to offload its roughly 62% holding into the market and hence generate more demand for the stock.
Consensus among market analysts is that RBS will pay out 8p a share in total for 2018 and 15.4p in 2019, equating to a 3.2% dividend yield this year and 6% next year, which would be higher than returns from cash in the bank or UK government bonds. This is also considered a very good yield in comparison with the UK equity market average which has an annualised yield of c. 3.79% (FTSE 100 as at July 2018).
One important valuation metric to look at is Price/Earnings ratio and as things stand RBS in London looks to be quite cheap in comparison to the broader market. In actual fact, the FTSE 100 12 month forward looking P/E stands at 13.7x whilst RBS is at 9.24x. We cannot of course look at just one metric to decide if a company is undervalued or not however these numbers should be a starting point for a strategy both if you are looking at capital growth and/or income.
Past performance is not a guide to future results. This information is being provided solely for information purposes and should not be deemed or construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax or legal advice. Similarly, any views or opinions expressed are not intended and should not be construed as investment, tax and/or legal recommendations or advice. No person should act upon any opinion and/or information in this document without first obtaining professional advice.