Royal Bank of Scotland (RBS) has announced plans to reinstate a dividend for the first time since the financial crisis, declaring an interim dividend of 2p per ordinary share in its half-year report today.
The payment of the dividend and the timing is dependent on when a fine by the US Department of Justice is finalised, relating to an investigation into RBS's issuance and underwriting of US RMBS.
RBS said it expects to build to a regular dividend payout ratio of around 40% over time and will consider further distributions in addition to regular dividend payouts, subject to both the agreement of the Prudential Regulation Authority and passing the 2018 Bank of England stress test.
The bank added further distributions are not likely to happen until 2019.
The UK government sold a 7.7% stake in RBS in June, reducing its ownership of the bank it bailed out with a £45bn rescue package in 2008 to around 62.4% from 70.1%.
Profits for the bank in the first half of 2018 were £888m with attributable profit of £96m in the second quarter. Operating profit before tax was £613m in Q2 compared with £1.2bn in the same period last year.
RBS CEO Ross McEwan said: "We have announced our intention today to pay an interim dividend as soon as we've signed with the Department of Justice so we're very pleased with that. The ability to get back into paying dividends... [it] has been 10 years since we did so.
"I'm confident the large legacy issues are behind us...The bank as you're seeing is becoming a much more normal bank, which is very pleasing to see."
The bank's share price was up 2.48% at 256.3p in mid-morning trading.
Helal Miah, investment research analyst at The Share Centre, described the results as "very encouraging", showing "good signs of progress".
"Operating profits in the second quarter came in at £613m, some way behind the first quarter figures but well ahead of expectations," he said.
"The most important sign of an increased health of the bank came in the form of the announcement of the first interim dividend since the financial crisis of 2 pence per share, this - combined with the better-than-expected profit figures - has contributed to the share price rising in early morning trading by a few percentage points.
"The reinstatement of the dividend will not only give existing shareholders some confidence but also to the large number of fund managers who could not invest in them previously due to the lack of any income and it will make the government's task of offloading its roughly 62% holding onto the market a little easier."
However, Miah warned of the many legacy issues the group still has to overcome.
"The dividend hike for the time being means the income is still very modest and we therefore feel that it is a share for investors seeking capital growth and a longer term recovery in the share price for those willing to accept a medium level of risk."
AJ Bell Investment Director Russ Mould said the consensus among analysts is that RBS will pay out 8p a share in total for 2018 and 15.4p in 2019, equating to a 3.2% dividend yield this year and 6% next year, which would be higher than returns from cash in the bank or UK government bonds.
He added: "Equally, investors are probably right to demand such a high yield to compensate themselves for both the residual risks associated with the company and its lack of real underlying growth - the bank is still shrinking itself, as shown by ongoing year-on-year declines in risk-weighted assets and loans, even if deposits did please by growing slightly.
"The bulk of the improvement in profits is therefore still coming from lower litigation costs, lower loan impairments and lower restructuring charges, so the quality of earnings may not be great, even if the quantity pleases.
"As with Lloyds and Barclays, investors will therefore be hoping that RBS can stay out of trouble and the regulators' sights, lend sensibly and keep costs in check, to help fund those precious future dividend payments."
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