Today I’ll be discussing the outlook for multinational mining giant Anglo American (LSE: AAL), and banking group Royal Bank of Scotland (LSE: RBS). Which of these FTSE 100 blue-chips is the better investment?
Downsizing
Shares in diversified miner Anglo American fell by almost 12% today as the market woke up to weak Chinese manufacturing data. Last week it was revealed that the company had agreed to sell its niobium and phosphates businesses to China Molybdenum for a cash consideration of $1.5bn. The sale is part of the mining giant’s plans to downsize and restructure its business and continue its debt reduction, which also involves selling its coal, nickel, and iron ore assets. The downsizing will eventually lead to the company focusing more on its De Beers diamond mining business, copper interests, and its platinum arm, Anglo American Platinum.
Anglo’s shares have performed well recently, soaring 146% in the last three months alone, but are still down 42% since this time last year. Analysts are expecting a poor performance from Anglo this year, with consensus forecasts predicting a 34% decline in underlying profits to £421m, or 28.73p per share. Next year however should see a strong recovery, with a 39% improvement to £580m, or 40.01p per share.
Anglo American trades on 25 times forecast earnings for the year to December 2016, falling to 19 next year. In my opinion the shares are still far too expensive given the high price-to-earnings ratio, and this presents investors with a high level of risk, especially if commodity prices decide to head south again.
Contrarian conumdrum
The Royal Bank of Scotland Group revealed earlier this week that the RBS brand was set to disappear from many high streets in a bid to improve its image and recover from the adverse publicity surrounding the government bailout and financial crisis. The banking group’s key brand in England & Wales will be NatWest with around 1,000 branches, whilst a further 300 branches will be rebranded as Williams & Glyn’s, which is expected to be sold off by the end of next year.
Meanwhile, in Scotland, the group’s 200 or so branches will be renamed Royal Bank of Scotland, whilst the Ulster Bank brand will be retained in Northern Ireland and the Republic of Ireland. The banking group was bailed out by the UK government in 2008 to the tune of £45bn, and is still 73% owned by the British taxpayer.
RBS shares have fallen by more than a third in the past twelve months and and now seem to offer good value over the medium term. Our friends in the City are expecting a 38% fall in earnings this year to £2.1bn, before bouncing back 25% to £2.7bn next year. This would leave the shares trading on a forward price-to-earnings (P/E) ratio of 13 for this year, falling to just ten for the year ending December 2017. Contrarian investors will be looking to buy RBS on the cheap whilst market sentiment is low.
The verdict
Anglo American is not an attractive investment for me as the risk-reward profile is unfavourable, furthermore the company offers no meaningful dividend to appeal to investors looking for income.
RBS on the other hand looks good value at the moment, given the low forward P/E rating and strong recovery in earnings next year. The shares should be attractive to contrarian investors looking to take a long-term position in the out-of-favour banking sector. RBS is by far the better investment in my view.