The last time Royal Bank of Scotland's shares traded at 230 pence, the world was rather different. It was early September 2008, Lehman Brothers had yet to collapse, "Sir" Fred Goodwin was still in the hot seat, and a majority state-owned RBS was hard to imagine. Unfortunately, the bank's forthcoming return to these dizzy heights is more about looks than fundamentals.
RBS is planning a one-for-10 stock consolidation, according to a letter sent to shareholders ahead of its annual general meeting. So the share count will be literally decimated while the share price, currently 23 pence, will rise tenfold. RBS's overall value will stay exactly the same.
Were RBS in the same position as Citigroup, which did a similar consolidation in March 2011, the share price refurbishment would be more convincing. Citi combined its reverse stock split with the reinstatement of a small but tangible dividend - a sign that it was on the mend. But RBS can't follow suit.
That's partly because it isn't making any money - in 2011 it posted a 2 billion pound net loss. The two-year ban on paying coupons and dividends levied in 2010 as punishment for RBS's state aid will soon lapse. But another element of its bailout package means if RBS ever does want to pay a dividend it would have to pay the government, which owns half its equity in the form of non-voting "B-shares", a fee of 1.8 billion pounds. Having a share price nearer non-state dominated banks like Barclays or HSBC could have some benefits. Small absolute changes in the share price will not show up as massive percentage changes, which may make investors forget that RBS is 82 percent owned by the state and still in massive deleveraging mode.
But the psychological effect works two ways. The other exit for RBS to escape its dividend-blocker albatross would be for its shares to trade at 65 pence for an extended period. Now that hurdle rises to a daunting 650 pence. Unless the bank can revisit the terms of its bailout, no amount of foundation will cover RBS's underlying ugliness.
Royal Bank of Scotland is to cut its share count by a factor of 10 via a reverse stock-split. On April 24, RBS sent shareholders a circular with details of the 1-for-10 consolidation to be voted on at its annual general meeting on May 30.
RBS said in the circular that large number of issued ordinary shares meant small absolute movements in the share price created large percentage movements. It added that it hoped the split would create a share price more appropriate for a company of RBS's size, reduce volatility and help consistent valuations.
The split would see RBS's overall share count of 111 billion ordinary and B shares cut to 11 billion, increasing the current 23 pence share price to 230 pence. However, share price targets linked to European Union state aid penalties and executive remuneration plans would go up in step as well.
Comments
Comments are closed.