Should I Buy RBS?
LONDON -- It's time to go shopping for shares again, but where to start? Dividend behemoth Vodafone? Smoker's friend British American Tobacco? Or maybe a slurp of Diageo?
There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy Royal Bank of Scotland (ISE: RBS.L) (NYS: RBS) ?
Bad bank, good bank
I've had two grabs at stricken bank RBS since the financial crisis, and I've got the scars to prove it. I bought in May 2010, at 50 pence per share, and again in September 2011, at the more pleasing price of 21 pence per share. Both were speculative buys. One has paid off (so far), one hasn't.
With RBS chief executive Stephen Hester claiming this week that "RBS is well on the way to being a good bank," is now the time to buy some more? And can RBS ever be anything more than a speculative buy?
Bullish banker
Hester gave a bullish talk to the City this week, delivering that "good bank" line and claiming its restructuring should be mostly finished by the end of 2013.
RBS should be free of state support even earlier, possibly by the end of this year, when it repays the asset protection scheme, set up following the taxpayer bailout for years ago. Hester even foresaw a day when the dividend payment can be resumed, although he didn't say when.
If the recovery continues, the government will even be able to start paying down its stake. It is still the majority stakeholder, owing 82% of the bank. Never shy, Hester called this "possibly the largest corporate turnaround in history."
In for a penny
RBS' share price has enjoyed a turnaround since July, rising 30% to today's price of around 26 pence (that's what happens when you invest in volatile penny shares!). That's still roughly half what the government paid for it.
It may be in recovery, but RBS still faces a heap of problems, such as paying compensation for PPI mis-selling and interest rate swaps, a potential fine for fiddling Libor, and the recurring controversy over Hester's pay package. It has also been heavily criticized for failing to lend during the downturn.
In August, the government even threatened to nationalize the bank, and although this threat appears to have subsided, investors should still price the risk in their calculations.
Rocky road ahead
If you invest in RBS, you are buying a swamp of uncertainty and mountain of problems, leading to the unexplored territory of a distant privatization. Hester may be talking up his achievements, but the recovery still has a long way to run, and you can expect plenty of volatility along the way, especially if eurozone woes worsen.
The RBS share price dropped 6% on Wednesday, as Athens burned. If it drops more, I'll be tempted to buy. Does that sound like speculation? Absolutely.
Many of you may prefer a more robust bank such as HSBC or Standard Chartered. But if you're prepared to hold on for the long term -- say, five or 10 years -- you should find there's still plenty of money in the bank.
Something you can bank on
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The article Should I Buy RBS? originally appeared on Fool.com.
Harvey holds shares in RBS, Diageo, and Vodafone. He doesn't own any other shares mentioned in this article. The Motley Fool owns shares of Standard Chartered. Motley Fool newsletter services have recommended buying shares of Vodafone Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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