The first point to mention when looking at Royal Bank of Scotland Group’s (LSE: RBS) (NYSE: RBS.US) ability to maintain and grow a dividend is that it doesn’t actually pay one.
Hmm. That is a short article. Okay, let’s expand…
Dividend hopes
Naturally, Royal Bank of Scotland hopes to pay a dividend soon. In fact, City analysts have 1.22p per share pencilled in for 2015. If that payout happens, RBS will provide a dividend yield of around 0.34% at today’s 359p share price.
That’s small fry without a doubt, but once dividend payments start then they are likely to ramp up. Forward earnings that year sit at around 28p per share, according to the forecasters, so that implies plenty of scope for a dividend increase in terms of cover from earnings.
Alas, earnings don’t provide the means to pay a dividend. Earnings vary according to the apparently random strokes of accountants’ pens. From what we’ve seen accountants engaged in the banking industry have the wildest pen strokes of all.
No, to pay a dividend it takes cash, and RBS’s recent record on cash delivery seems wanting:
|
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Net cash from operations (£m) |
(992) |
19,291 |
3,325 |
(45,113) |
(30,631) |
|
Net cash from investing (£m) |
54 |
3,351 |
14 |
27,175 |
21,183 |
|
Net increase/decrease in cash (£m) |
9,261 |
8,344 |
125 |
(19,814) |
(11,664) |
The long and winding road
It’s not surprising that RBS struggles to generate cash. The firm technically went bust and the British government artificially saved it with bailout — The Solicitor For The Affairs Of Her Majesty’s Treasury still owns the majority of RBS’s shares.
Since the British taxpayer stepped in RBS has worked hard to reduce its ego-inflated balance sheet by culling huge swathes of ‘assets’ around the world. The name of the game at RBS is to shrink, shrink and shrink some more, to focus on the UK core of its operations.
What could emerge eventually is a smaller, more stable bank that may be capable of sustaining a dividend payment policy.The firm’s chief executive reckons the bank will be simpler and fairer to its customers, too. He says RBS is achieving a stronger capital position, lower costs and gradually improving customer activity.
As investors, we shouldn’t become complacent about RBS, though. The man at the top reckons the firm is managing down a slate of significant legacy issues, including significant conduct and litigation issues that will likely hit profits going forward.
What now?
Banks are cyclical businesses and, as an investment proposition, they have that against them from the start. When banks have been behaving badly in the past, who knows what lurks in the asset base or financial statements.