Royal Bank of Scotland could be very rewarding for patient investors.
There's a share, a major FTSE 100 company into the bargain, that had net tangible assets at 31 December 2010 of 51p, its own figure in the annual accounts, whilst its current price is about 40p.
If you believe as I do that Price to Tangible Book (P/TB) is the king of the value ratios then this has to be attractive at 0.78. The share is Royal Bank of Scotland (LSE: RBS) and the assets per share takes account of both the ordinary and B shareholders to be as conservative as possible.
I'm writing about it now because of a sizeable fall in bank shares on Thursday which caught my eye. It doesn't really matter to me why bank shares fell, just that they did.
For those who think there has to be a reason for every move, which I don't, this is due possibly to poor figures from Lloyds Banking Group (LSE: LLOY) which included a big hit from providing against potential liabilities for mis-sold loan payment protection insurance.
It's an ephemeral issue to which the market has over reacted, in my view. Nobody is going to recall what that was all about a few years down the line and it's all just general poor sentiment providing a possible buying opportunity, value style.
The banking recovery
The bank recovery is a long time coming and for RBS it maybe the longest of them all.
RBS was one of the biggest casualties of the financial collapse but worse than that, it has the dubious distinction of being one of those that actually caused it. It was bust at the time and saved from going under only by massive government aid to the extent of holding over 80% of the share capital now.
But unlike fellow, but far smaller, bust bank Northern Rock which was wholly nationalised and thereby lost everything for shareholders, RBS was permitted to retain its stock market listing, thus leaving room for investors including the government to try and recover some money out of the disaster eventually.
Make no mistake, RBS aint no pyad share. It hasn't been, and won't be, paying dividends for years, and makes losses. Of course, being a bank, it has a lot of debt because, well, that's how banks operate -- they borrow at one rate, lend higher.
So it's a one leg job out of the four that form the deep value plays in my book. But book is the one thing it has got, plus I like the fact that it's still a very big cap, bigger than most at around £44bn, even on its present mickey mouse price of 40p. That's compared with about 600p in early 2007, so imagine how gargantuan it was back then.
Bigger is better
I've written before that a big cap value play is usually preferable to a smaller same, assuming otherwise similar numbers.
The reason is that in the markets, bigger is better from a survivability point of view and when the chips are down, as they most certainly were for RBS in the depths of the collapse, size matters. That sheer mass of the company was probably the reason it remains listed rather than the government NRocking it into full nationalisation.
People generally have more interest in trying to ensure the survival of a very big business than a small one for several reasons such as jobs, international considerations and so on. Size isn't a big consideration in my style of value investing, in fact most good or pyad plays are much smaller businesses, but it is a dab of icing on the cake if it's there.
The long view
If you are interested in RBS, you must look upon it as a longer term investment. All value plays require patience but this one will likely test that to the limit especially as there is no yield to sweeten the wait.
It's a risk, you are banking literally on recovery to a profitable business with dividends resumed and the rest of it. But this risk I see as having very high upside and pretty limited downside.
I'm not saying it will go back to its recent peak of 600p any time soon, but it does look like a share which could multiply itself several times in a period of years and could deliver a very high average annual return, if you can wait it out.
The government will eventually sell its stake though it's arguable what signal that would give. Typically, investment decisions by bureaucrats are wrong, so a sale could signal the start of a good uptrend. Or, this could be the one in a hundred they get right and it marks the top of a trend. So the likelihood in my view is that a government sale of its RBS shares is far more likely to indicate rises to come.
And what's the worst that can happen? Well it could go under, losing you the lot via a full nationalisation. Any share can go bust but my guess though is that this is now fairly unlikely with RBS, given that it didn't happen in the darkest days of the last few years.
A more likely outcome perhaps is that the shares go nowhere for years because the recovery just doesn't really work out. So it staggers along, dividendless, perhaps in a narrow trading range as it has already for some time, wearing you down. Eventually you can get fed up and sell.
I don't think this latter outcome is what will happen though it could easily persist for some time to come. Sooner or later I expect that RBS will do the business and do it handsomely but don't hold your breath.
One to put away for the long haul, but that long haul could be especially rewarding in this case and right now, they are a little cheaper than recently.
More from Stephen Bland:
> Of the shares mentioned, Stephen holds Lloyds.