In the last five years, the highest level at which the Royal Bank of Scotland Group plc (LON:RBS) (RBS.L) share price has traded is around 400p. Today, it is trading at 245p, which is a fall of 39%.
In my view, the prospects for a recovery seem to be relatively bright. The company has put in place what I believe is a sound growth strategy that could lead to improving financial performance over the coming years.
One problem facing the bank, though, is that the prospects for the UK economy continue to be relatively weak. UK GDP growth is expected to lag many other major developed economies over the medium term, while the risks from Brexit could hold back investor sentiment towards the wider FTSE 100 banking sector and also towards UK-focused shares.
Additionally, RBS still faces legacy issues. For instance, PPI claims are set to run for a number of months. The bank is also still part-owned by the government, and this situation could continue over the medium term.
That said, the prospects for the company appear to be improving. It is expected to produce EPS growth of 5-6% per annum over the next two years. This is due to encourage a higher dividend, with the company’s management seemingly optimistic about the long-term prospects for the bank. Dividends are expected to be 12.9p per share in 2019, which puts the stock on a forward dividend yield of 5.3%. That’s around 130 basis points higher than the FTSE 100’s dividend yield.
Since RBS has a P/E ratio of around 10 at the moment, the company appears to offer a large margin of safety. This suggests that it could offer impressive turnaround potential in the long run. In the near term, there could be volatility ahead. But I’m cautiously optimistic about its investment prospects over the coming years.