UK Edition
Questor: buy RBS while no one else wants it – its first post-crisis dividend could surprise you
How would you like a “pariah stock” in your portfolio? It doesn’t sound like a very appealing idea – until you realise that these are the very stocks whose true value is most likely to be overlooked.
“Contrarian” or “value” fund managers specialise in holding the shares that no other investor wants to own, in the knowledge that an almost complete absence of buyers can only send the price to rock-bottom levels.
When Questor asked one such manager to pick one of his stocks for readers this week, his answer might surprise many: Royal Bank of Scotland.
The bailed-out lender is still 73pc owned by the state and has not paid a dividend since the financial crisis.
The manager, one of Britain’s most highly regarded value investors, said: “A ‘pariah stock’ immediately interests us as it suggests investors have not looked seriously at it for some time.
“And that matters in this case as so much has changed at RBS over the past decade.
“Let’s not forget that a decade ago it was run in a very aggressive way – it was high-growth and acquisitive, had an extraordinarily weak balance sheet and was subject only to ‘light-touch’ regulation.
“Now RBS is run very conservatively, has a much stronger balance sheet than was historically the case and is highly regulated, which works as a positive in terms of reducing the risks of banks doing something stupid. This is all very positive.”
He said RBS was “a reasonable way down the recovery path”, despite the problems involved in separating the Williams & Glyn arm, the fines for various wrongdoings and the need for further disposals of non-core assets.
But the fund manager said the core business of RBS retained strong positions in UK retail and small business banking and had succeeded in growing its loan book in low-risk areas such as high-deposit mortgages, while there were still opportunities to cut costs.
“RBS is off investors’ radars currently, but when it returns to the dividend list within the next two years investors could be surprised at the size of the payment,” he said.
Questor says: buy
Ticker: RBS
Share price at close: 252.2p
Update: Capita
It has taken a while but shares in Capita are now within striking distance of the price at which we advised readers to hold in October last year. The shares had fallen sharply following a profits warning but a positive trading update yesterday sent the price up by about 15pc to close at 634p, compared with 669p at the time of our tip.
“We are making good progress on executing the strategic initiatives laid out at the end of 2016 to reposition the group and create a simpler business better placed to return to profitable, sustainable growth,” the update said.
Neil Woodford, the high-profile fund manager, remains a holder of the shares.
Questor says: hold
Ticker: CPI
Share price at close: 634p
Update: Motorpoint
Another share that we recommended after a profits warning is Motorpoint, the car dealership.
It has had its ups and downs since our buy tip at 141½p in October, falling to 122p at one point.
But following the publication of encouraging full-year results on Monday the shares have now recovered to 150p, so readers who took our advice have made a modest 5.3pc gain.
Harry Nimmo, of Standard Life Investments, continues to hold the stock.
Questor says: buy
Ticker: MOTR
Share price at close: 150p
Update: Berendsen
Berendsen, the laundry services business tipped as a buy at 797p in April, has agreed to be acquired by Elis, a French rival, for £2.2bn.
Shareholders will receive 540p in cash and 0.4 shares in the new company for every Berendsen share. There will also be an 11p dividend for the six months to June 30.
This values each share at £12.61, which would net investors who followed our original tip a 58pc gain.
Ticker: BRSN
Share price at close: £12.10