The new government really hasn’t wasted any time in its efforts to get the budget deficit down by selling off its share in state-owned businesses. First we heard there’s going to be a new sale of Lloyds Banking Group shares some time in the next 12 months, and that was quickly followed by plans to offload more Royal Mail shares to the public.
Now it’s the turn of Royal Bank of Scotland (LSE: RBS)(NYSE: RBS.US), after Chancellor George Osborne has announced the sale of some of the 80% of RBS currently owned by taxpayers.
Selling at a loss?
When it put more than £45bn into RBS back in 2008, the government effectively paid £5 per share, and with the shares now trading at 360p there are some arguing that selling them off so much cheaper is cheating taxpayers. But anyone who invests in shares knows that’s nonsense. A share is worth only what it’s worth today, with the original purchase price utterly irrelevant — and strategies based on only selling shares that have gone up are almost invariably ruinous.
Putting that aside, should we pile in when the new lot of RBS shares is offered to us?
I’m generally welcoming of such opportunities, as they’re almost always sold off at a big enough discount to guarantee they’re attractive. But that can be misleading once we consider the small allocation most of us are likely to get, and the trading costs associated with a short-term buy-and-dump approach. No, for me, any decision on RBS would be based on its long-term valuation. And on that measure, I find it wanting.
Back in profit
The bank should be back to profit this year, and although there was an “attributable loss of £446 million for the first quarter of 2015“, the company did point out that was after “restructuring costs of £453 million and £856 million of litigation and conduct charges“. RBS actually reported a Q1 operating profit of £325m, which bodes reasonably well for the £1bn in pre-tax profit forecast for the full year.
But though we’re pretty much assured of recovery now at RBS, even forecasts as far out as December 2016 put the shares on a P/E of 14 on today’s price, with dividend yields expected to be only back to 1.5% by then. To contrast that, Lloyds shares are on a 2016 P/E of under 11, with dividend repayments already restarted and a yield of 4.8% predicted for the same year.
No thanks
The City’s analysts are with me on this too, putting out a strong Buy consensus for Lloyds but with a swing towards Sell on RBS. I know RBS shares will be offered at a discount when they’re sold, but even with that in mind I just see so many shares out there that look better value at full market price that I just can’t see the forthcoming offer as being attractive.
So for me it would be a Yes for Lloyds, a Maybe for Royal Mail, but a No for RBS.