I though Id set myself a challenge today and try to think of a good reason to buy Royal Bank of Scotland (LSE: RBS) (NYSE: RBS) shares. Its not easy.
The problem is, everything that looks positive about RBS looks even better over at Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US).
RBS is recovering, certainly, and over the past three years the shares are up more than 50% to 345p while the FTSE 100 is up less than 30%. Thats really not bad. But the markets have been more impressed by the story at Lloyds and have rewarded shareholders with a 120% gain to 73p.
While Lloyds managed to record a pre-tax profit last year (albeit a small one), RBS crunched home with a bone-jarring 8bn loss.
No cash here
Bank shares are often bought for their dividends. But not RBS, which has been unable to pay out a penny in the past five years and is not going to be doing it this year either.
Thats not surprising, as the banks are retaining cash to get their liquidity ratios up to spec, and analysts suggest that RBS will be back to paying dividends by the second half of 2015. But the forecast yield is only a measly 0.3%.
Again, Lloyds is ahead, with the bank expected to seek permission to make a second-half payment this year to provide a yield of 1.7%.
Not fair
Its unfair to slate RBS for simply being behind Lloyds, and Id be more attracted if current valuations reflected that difference. But even looking ahead to December 2015, we find RBS shares on a forward P/E of over 12 against Lloyds 2014 P/E of 9.5. Its also way ahead of Barclays, too, and Barclays is offering 3-4% in dividends.
And after a return to profit this year, RBS has a flat year forecast for 2015. Why, then, are investors paying so much for RBS shares?
The real reason must surely be future profit expectations, with RBS being a lot further away from pre-crash levels then LLoyds and all the rest? Well, RBS is forecast to turn in a pre-tax profit of 5.2bn in 2014 followed by 5.7bn for 2015, and thats not all that far behind Lloyds forecasts of 6.3bn and 7.6bn in fact, compared to market cap RBS is already significantly ahead.
In isolation
Looking at RBS alone, the motivation for buying is surely that in a few years time those profits will be significantly higher, dividends will be back up to sector levels, and to maintain todays P/E values there will hopefully be a share price gain.
But I really dont see why youd buy RBS today when Lloyds is there.
Even if RBS might not be the one right now, investing in banks for the long term has propelled many an investor into the millionaire bracket. Check out the Motley Fool’s brand new report, How You Could Retire Seriously Rich if you want to know more.
Did you know, for example, that 100 in cash in 1900 would be worth less than 400 today, but the same invested in shares would have topped 28,000?
Click here to learn more and pick up some top ideas to enhance your personal wealth.
Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
