Why I think 2019 could be the year the RBS share price finally takes off
I have been bullish on the Royal Bank of Scotland (LSE: RBS) share price for some time.
Indeed, ever since the company announced that it had settled with the US Department of Justice last year, settling its final substantial outstanding liability from the financial crisis, I’ve believed it will only be a matter of time before the market re-rates the stock.
Admittedly, it has taken longer than I thought for investors to return to the RBS share price.
Even though the bank has announced bumper results and decided to restart dividend payments for the first time since the financial crisis, the stock has produced a total return of -1% over the past 12 months, underperforming the FTSE 100 by 3.5%.
Over the past three years, RBS’s investors have seen a measly total annual return of just 4.1%, lagging the FTSE 100 by 5.3% (per annum).
However, I think this could all be about to change. It is now stronger than it has been at any other point in the past 10 years, and while it looks as if the market still does not trust the business, fundamentally the company is only getting more attractive by the day.
And some investors are already starting to return. Year-to-date, the RBS share price has yielded a total return of 18.6%, and this could be a sign of things to come.
Stronger by the day
Back in February, RBS surprised investors and analysts alike when it announced a significantly larger than expected dividend for the full year. Following a 50% increase in pre-tax profits, management declared a total distribution for the year of 13p per share, for a total outlay of £1.6bn.
The decision by management to reward investors with a higher than expected payout tells me they believe the bank’s recovery process is coming to an end.
Over the past 10 years, the RBS share price has been held back as the business has struggled with legacy issues such as fines and high operating costs. It now looks as if it has put the majority of these issues behind it. For example, pre-tax profit increased 50% last year, but revenues edged up just 2%. Lower costs and a decrease in bad loans and provisions were responsible for almost all of the profit growth.
This seems to indicate that no matter what happens with Brexit, RBS is now back on a firm footing. If the company continues to report profitable growth throughout 2019, then I think it is going to be difficult for analysts and investors to continue to justify their caution towards the business.
At the time of writing, the RBS share price is trading at a price-to-tangible book value of 0.8 and a forward P/E ratio of just 9.5. These numbers suggest there is already plenty of bad news baked into the stock, so even if profits do slide from here, I think the downside is limited.
On the other hand, when confidence returns, the stock could trade back up to book value, which implies a potential upside of 27% from here. I think that is a risk worth taking, and there’s also a dividend yield of 4.6% on offer while you wait.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.