RBS (LSE: RBS) (NYSE: RBS.US) is a stock that I think has a great few years ahead of it.
One reason for this is that I believe its current valuation is far too low.
Indeed, using the price-to-book ratio (which is a relevant measure in the banking sector) RBS screams value, with its ratio of net assets to market capitalisation being just 0.33.
This means that investors can buy £1 of net assets in RBS for just one-third of the value as listed on the balance sheet. For me, this is simply too good to be true.
Of course, the net assets of RBS may shrink as a result of further losses or the write down of more assets — particularly its US property portfolio which has been hit in recent years. However, even taking into account such potential falls, shares still look to be far too cheap and, as such, I don’t believe they will stay this low for too long.
However, a cheap share price is not the only reason why I’m bullish on RBS and am thinking of adding to my shareholding.
As an income-seeking investor, I’m optimistic (as is the market) that RBS will pay a dividend of around 2p per share in 2014. This equates to a yield of just 0.5% but, with no dividend being paid since before the start of the credit crunch, it’s a start.
Certainly, RBS is unlikely to become a super yield stock overnight but within a few years it may just be a welcome addition to an income portfolio. For this reason, I’m keen to add more shares to my portfolio.
In addition, RBS is focused on the UK and, in my view, the UK’s prospects are improving so it’s a good place to be. Of course, an economic boom is unlikely to occur in 2014 but the chances are that things will improve to some extent. This means that RBS could suffer less from write downs than it has in the past and may benefit from the Help to Buy scheme boom which many investors are predicting, since only it and Lloyds have signed up to the government’s scheme.
So, I’m bullish on RBS because of what I believe is a very low valuation, the potential for a growing yield as well as RBS being focused on the UK, an economy that I believe will experience an improvement in fortunes over the medium to long term.