Today I am looking at banking giant Royal Bank of Scotland Group‘s (LSE: RBS) (NYSE: RBS.US) dividend outlook past 2014.
An unattractive dividend proposition
Like Lloyds Banking Group — which was also part-nationalised by the UK government following the 2008/2009 worldwide banking crisis — Royal Bank of Scotland is yet to receive the green light on shelling out dividends once more to its shareholders.
Still, City brokers expect the bank to fork out its first dividend in seven years in 2014, with a token 0.6p per share payout pencilled in. And this is expected to be followed by a 4.1p dividend next year, a 583% annual rise.
Indeed, forecasters expect Royal Bank of Scotland to punch losses to the tune of 13.6p per share for 2013 — results for which are due on Thursday, February 27 — before bouncing back strongly in 2014 to record earnings of 25p. And the bank is forecast to deliver earnings of 28.3p next year, a 13% advance.
Of course, a resumption in the firm’s dividend policy should be music to the ears of potential investors. However, predicted payments for this year and next create miserly yields of just 0.2% and 1.2% respectively. By comparison, the wider banking sector currently sports a forward average yield of 3.7%, while the FTSE 100 sports a corresponding readout of 3.1%.
In my opinion, Royal Bank of Scotland’s lowly yields make it an unappealing medium-term choice for dividend investors. And although payouts are expected to ratchet up during this period, I believe that ongoing operational problems at the bank could weigh heavily on dividend growth further out.
The firm announced just this week that it has been forced to raise an additional £1.9bn in provisions to cover legal claims and conduct matters, predominantly related to “mortgage-backed securities and securities related litigation.” Royal Bank of Scotland has also pumped an extra £465m into covering the mis-selling of payment protection insurance (PPI), taking the cumulative total to £3.1bn, and an additional £500m for the wrongful sale of interest rate hedging products. Provisions for this now stands at £1.3bn.
These legacy issues continue to rack up billions in losses for the bank, and the full extent of these penalties are likely to remain elusive for some time to come. Meanwhile, the firm’s decision to build a £38bn ‘bad bank’, combined with the impact of heavy divestments on the bank’s long-term revenues potential, are likely to severely hamper earnings growth — and with it dividend expansion — in coming years in my opinion.