The Royal Bank of Scotland (LSE: RBS) share price had a wobbly 2018, but in the new year it’s been picking up. Since the end of December, RBS shares have gained 19%, nicely ahead of the FTSE 100‘s 11% rise.
There seems little doubt the price would have recovered more strongly were it not for that massive millstone hanging round the neck of the banking business — Brexit. Or at least the fear of a no-deal Brexit. That’s one of the reasons fellow Fool Royston Wild is bearish about the sector, and I can certainly understand those who exercise such caution.
Overhang
Another thing that must surely be holding back the RBS share price, as Roland Head explains, is the fact the government still owns 62% of the shares — and the selling off of such a huge number of shares would provide downward pressure on the price.
The bank’s own plans to buy back some government shares should help with that, but we also face the uncertainty of what a Labour government might do with RBS. Jeremy Corbyn, that champion of nationalisation, has already been mooting the idea of taking over RBS and running it as a state retail bank. And that could be a calamity for current shareholders.
Despite all that, investor sentiment is looking positive at the moment, and a look at RBS’s earnings recovery makes the bank look like a good investment to me.
Dividends
It’s taken RBS a few years longer than Lloyds Banking Group to get back to paying decent dividends. But after a modest ordinary dividend last year, there’s a yield of 5% on the cards for 2019, followed a year later by 6.5%. That’s on the back of rising earnings forecasts.
We also saw a special dividend for 2018 of 7.5p per share, taking the sum of RBS’s dividend payments for that year to £1.6bn. At full-year results time, the bank told us: “We expect to maintain ordinary dividends of around 40% of attributable profit.” I can see more scope for further special dividends too.
The RBS focus on retail banking and supporting smaller businesses has certainly won my approval, and I think it’s exactly the right strategy to approach for the UK’s post-EU future. RBS has reportedly doubled its funding for supporting small businesses to £6bn. While initially the fund was aimed at supporting businesses troubled by Brexit, according to subsidiary NatWest there’s increasing demand across the economy, including firms involved in green energy and technology.
Revaluation?
RBS shares are currently valued at around nine times forecast earnings, and that’s with more strong EPS growth on the cards. In normal circumstances, without the government’s inept Brexit attempts casting such a huge shadow on the banking sector, I could see RBS shares commanding a significantly higher rating. In fact, considering the bank’s healthy balance sheet, its attractive dividend yields, a commitment to a strong dividend policy, and its earnings forecasts, I could easily see a 50% upside to RBS shares.
That would suggest a share price getting on for 390p. So is that feasible? I’d say not while there’s still a chance of a no-deal Brexit. But my confidence is growing that that’s not going to happen.