A Closer Look at Royal Bank of Scotland's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Royal Bank of Scotland Group  (LSE: RBS  ) (NYSE: RBS  ) and assessing whether the company is an appetizing pick for income investors.

How does Royal Bank of Scotland Group's dividend history stack up?

  2009 2010 2011 2012
FY Dividend Per Share 0p 0p 0p 0p
DPS Growth - - - -
Dividend Cover n/a n/a n/a n/a

Source: Royal Bank of Scotland Company Accounts.

Royal Bank of Scotland has not paid dividends since it was part-nationalized during the furore of the 2008-2009 banking crisis.

What are Royal Bank of Scotland Group's dividends expected to do?

  2013 2014
FY Dividend Per Share 0p 0p
DPS Growth - -
Dividend Cover n/a n/a
Dividend Yield 0% 0%

Source: Investec.

Investec has pencilled in earnings per share (EPS) growth of 2.5p for 2013, swinging from a 54.3 pence loss last year, and which it expects to rocket to 21.4 pence in 2014. However, the broker does not expect this turnaround to translate into dividends again until 2015 at the earliest, with a 10 pence full-year payout predicted and that carries a 3% dividend yield.

Royal Bank of Scotland announced earlier this month that it had finally swung back into profit during quarter one, printing pre-tax profit of 826 million pounds versus a pre-tax loss of 1.5 billion pounds in the comparable 2012 period.

However, the first quarter is historically a strong period for the bank, and signs of falling profitability at its core operations -- profits from its U.K. Retail and U.K. Corporate divisions fell 63% in January-March to 800 million pounds -- combined with ongoing restructuring costs is still casting a pall over future earnings potential.

How does Royal Bank of Scotland Group's dividend prospects rate against the competition?

  Prospective Dividend Yield Prospective P/E Ratio
Banks 3.7% 13.1
FTSE 100 3.1% 16.3

Source: Digital Look.

Royal Bank of Scotland was recently dealing on a P/E ratio of 15.3 for 2013, representing a premium to the wider banking sector but which compares more favourably to the rest of the FTSE 100. However, both of these groups offer chunky dividend yields, something to which Royal Bank of Scotland still aspires.

In my opinion, Royal Bank of Scotland's earnings turnaround remains lukewarm at best, while uncertainty over the impact of fresh legal action relating to PPI mis-selling and 2008's rights issue -- not to mention the timing of the British government's sale of its 84% stake, which should become clearer at Chancellor Osborne's Mansion House speech in June -- is also looming large over the bank. I believe that these considerations make the firm an unattractive stock selection currently.

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