In a recent interview with the FT, Chancellor George Osborne said he would like to get rid of the governments 79% stake in Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) as quickly as we can after the general election.
The mood is clear: the government wants to sell its banking shares, preferably for a modest profit. In this article, Ill take a look at whether I believe private investors should be buying Lloyds and RBS in the current market.
Analysts are bullish on Lloyds, and the bank currently trades on a 2015 forecast P/E of just 10, despite Lloyds shares trading at 81p within a whisker of last years post-2009 high of 85p.
Lloyds has now restarted dividend payments, and will pay 0.75p per share to shareholders for the 2014 financial year.
Although this only provides a yield of 0.9% at todays share price, Lloyds medium-term intention is for the payout ratio to rise to 50% of sustainable earnings and consensus forecasts suggest a payout of 2.8p is likely in 2015, giving a prospective yield of 3.5%.
In my view, Lloyds is returning to its roots as a cash generative, conservative UK bank: for income investors, now could be a good time to buy.
RBSs recent full-year results were uninspiring, and triggered an 8% slide in the banks share price.
Returning RBS to private ownership wont be simple, either. The government needs to sell 45bn of shares at an average of 455p per share in order to break even. Thats around 20% above todays share price.
However, RBS is making big cuts to its investment banking operation and is focusing on becoming a UK retail bank essentially similar to Lloyds. Successful delivery of this strategy could help cut costs and boost earnings faster than expected.
In terms of valuation, RBS looks slightly more expensive than Lloyds, on a forecast 2015 P/E of 12.5. However, unlike Lloyds, RBS shares trade slightly below their tangible book value, and I believe this discount offsets the risk implied by the higher P/E rating.
Ultimately, I see Lloyds as a decent income buy, but I believe RBS could deliver bigger gains for investors over the next 3-5 years.
However, banks remain complex and risky investments, and if you already own banking stocks, you may want to look elsewhere for your next buy.
If you’re hunting for stocks which could outperform the wider market, then I’d urge you to take a look at the simple 7-step wealth guide in “7 Simple Steps For Seeking Serious Wealth“.
This free, no-obligation report contains details of an investment strategy the Motley Fool’s experts believe could deliver big gains — even if you only spend 20 minutes per month on your portfolio.
For immediate access to this important report, click here now.
Do NOT buy this stock
Theres lots of opportunity out there in todays market but theres also PLENTY of danger.
In anticipation of Champion Shares PROs brief opening to new membership a few short weeks from now, the analyst team behind the Motley Fools most exclusive service has agreed to share 1 stock they believe YOU would do best to avoid.
PRO research is rarely made available to the general public. To find out the name of this “don’t buy” company — and to claim your 100% FREE copy of Steer Clear Stocks right away — simply click here.