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This week saw taxpayer-rescued Royal Bank of Scotland (RBS) pay the UK treasury a whopping £1.2bn. Why? To allow it to restart paying dividends. Great news for shareholders, especially with peer Lloyds (LLOY) having just resumed its own payments. Nothing has been payable on RBS shares since early 2008, much to the discontent of long-term holders, so there was much excitement among clients and eagerness to know more about resumption of the long-lost income and yield that once contributed handsomely (2007 yield: 7%) and made up the cornerstone of investment portfolios. While the news is of course positive and a welcome step in the right direction, there is one small problem……
Peer Lloyds posted another profit in 2015 (pre-tax profit; £1.6bn), allowing it to pay both a normal and special dividend. RBS, on the other hand, clocked up an eighth consecutive year of losses (pre-tax loss; £2.7bn), the aggregate of which now eclipses the £45bn required to bail it out at the height of the financial crisis. A condition of the bailout was that no dividends could be paid out before the bank had been restructured and nursed back to health which makes perfect sense. And while the bank is significantly closer, it is not quite there yet. Capital buffers are much improved, but Business bank Williams & Glynn is yet to be spun off and the previously mammoth investment bank division remains in shrinkage mode. Legal provisions still are still lurking too.
And amid all the excitement from this week’s announcement, shareholders appear to have forgotten that the bank’s FY results disappointed, not just on the financial front but also with news that dividends were unlikely before Q1 2017. That’s another 12 months to wait, at least. By which time Lloyds could be rewarding shareholders with annual cash returns north of 6%. Maybe even more special dividends. Without heavy restructuring of £2.9bn last year RBS may well have turned a profit, however that restructuring is essential so a loss is a loss.
Don’t forget also that Lloyds has only just resumed dividend payments having patiently waited for a second successive year in the black and for solid growth before daring to promise what long-term income-seeking investors have been needing to hear before diving back in. This week’s news has failed to get RBS shares off their lows and out of a downtrend. Lloyds, however, remains up around recent highs, not far from the price level at which George Osborne can pull the trigger on that £2bn discounted share sale we have been waiting for.
Investors in the UK banks need to decide where their priorities lie: income or share price gains?
For help in making that decision, and to help you stay abreast of what’s happening in the sector, trial our research free for two weeks
Mike van Dulken, Head of Research, 24 Mar
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