The first point to mention when looking at Royal Bank of Scotland Groups (LSE: RBS) (NYSE: RBS.US) ability to maintain and grow a dividend is that it doesnt actually pay one.
Hmm. That is a short article. Okay, lets expand
Dividend hopes
Naturally, Royal Bank of Scotland hopes to pay a dividend soon. In fact, City analysts have 1.22p per share pencilled in for 2015. If that payout happens, RBS will provide a dividend yield of around 0.34% at todays 359p share price.
Thats small fry without a doubt, but once dividend payments start then they are likely to ramp up. Forward earnings that year sit at around 28p per share, according to the forecasters, so that implies plenty of scope for a dividend increase in terms of cover from earnings.
Alas, earnings dont provide the means to pay a dividend. Earnings vary according to the apparently random strokes of accountants pens. From what weve seen accountants engaged in the banking industry have the wildest pen strokes of all.
No, to pay a dividend it takes cash, and RBSs recent record on cash delivery seems wanting:
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
Net cash from operations (m) |
(992) |
19,291 |
3,325 |
(45,113) |
(30,631) |
Net cash from investing (m) |
54 |
3,351 |
14 |
27,175 |
21,183 |
Net increase/decrease in cash (m) |
9,261 |
8,344 |
125 |
(19,814) |
(11,664) |
The long and winding road
Its not surprising that RBS struggles to generate cash. The firm technically went bust and the British government artificially saved it with bailout The Solicitor For The Affairs Of Her Majestys Treasury still owns the majority of RBSs shares.
Since the British taxpayer stepped in RBS has worked hard to reduce its ego-inflated balance sheet by culling huge swathes of assets around the world. The name of the game at RBS is to shrink, shrink and shrink some more, to focus on the UK core of its operations.
What could emerge eventually is a smaller, more stable bank that may be capable of sustaining a dividend payment policy.The firms chief executive reckons the bank will be simpler and fairer to its customers, too. He says RBS is achieving a stronger capital position, lower costs and gradually improving customer activity.
As investors, we shouldnt become complacent about RBS, though. The man at the top reckons the firm is managing down a slate of significant legacy issues, including significant conduct and litigation issues that will likely hit profits going forward.
What now?
Banks are cyclical businesses and, as an investment proposition, they have that against them from the start. When banks have been behaving badly in the past, who knows what lurks in the asset base or financial statements.
I’m not up for taking a chance with a bank like Royal Bank of Scotland Group. Instead, I’d rather invest in three companies that look set to do well this year. The Motley Fools top team of share analysts reckons these three could be among the best picks for 2014 and beyond.
One company is a largely ignored small cap. There’s a play on technology focused high-tech defence applications, and the third provides a vehicle to ride emerging-market potential.
I’m glad to have the Fool analysts’ sign-posting report on my side. It’s free for a little while longer. Find out more by clicking here.
Kevin does not own shares in Royal Bank of Scotland Group