Is RBS the Ultimate Retirement Share?


LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the U.K. large caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at Royal Bank of Scotland Group (ISE: RBS.L) (NYS: RBS) , which was bailed out to the tune of 45 billion pounds by the taxpayer in 2008 and remains 82% public-owned. Can it recover?

RBS vs. FTSE 100
Let start with a look at how RBS has performed against the FTSE 100 over the last 10 years:

Total Returns






10-Year Trailing Avg.

Royal Bank of Scotland







FTSE 100







Source: Morningstar. Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.

RBS' performance against the FTSE 100 has been pretty disastrous since 2007, but there are some signs that the bank might be able to return to normal soon. The bank's share price is up by 33.7% so far this year, compared to a 3.7% gain for the FTSE 100.

What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how RBS shapes up:



Year founded


Market cap

16.3 billion pounds

Net debt


Dividend Yield


5-Year Average Financials

Operating margin


Interest cover


Earnings per share (EPS) growth


Dividend growth


Dividend cover


Source: Morningstar, Digital Look, Royal Bank of Scotland. *The last time RBS paid a dividend was in 2007, when it was covered 2.5 times.

Here's how I've scored RBS on each of these criteria:





At nearly 300 years old, it's one of Britain's oldest companies.


Performance vs. FTSE

Performance has been dire since the financial crisis.


Financial strength

Underlying operations are profitable but some concerns remain.


EPS growth

After four years of losses, a profit is forecast this year.


Dividend growth

No dividend has been paid since 2007. Dividends are expected to restart in 2013.


Total: 11/25

A score of 11/25 is pretty bad, and this bank's problems are not yet over. Although RBS' core operations are profitable, it faces ongoing costs from regulatory issues such as Payment Protection Insurance claims, on which it has already spent 1.0 billion pounds. There's also the possibility of further writedowns on its assets, plus the ultimate risk that the bank, which is already 82% owned by the taxpayer, could be completely nationalized, leaving shareholders with nothing.

Although RBS does currently look cheap, with its shares trading at just over half its net asset value, I don't believe RBS is a good retirement share. It provides no income at present, and there are too many unknown factors in the bank's future, with no guarantee that all of these problems can be solved without doing further harm to shareholders' interests. This is a conclusion shared by one of the U.K.'s leading fund managers, Neil Woodford, who looked ahead and sold his banking shares before the credit crunch struck -- and doesn't think it's safe to buy back into British banks yet.

Woodford's income picks
Neil Woodford is one of the most successful income investors currently working in the City. He manages more money for private investors than any other City manager, and his dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011, helped by his early exit from U.K. bank shares into safer alternatives.

The good news is that you can learn about Neil Woodford's eight top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Woodford's choices look like excellent retirement shares to me, and the report explains how he chose some of his biggest holdings.

This report is completely free, so I strongly recommend you click here to download this free report today, as it is available for a limited time only.

The article Is RBS the Ultimate Retirement Share? originally appeared on

Roland does not own shares in Royal Bank of Scotland 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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