The NatWest (LSE:NWG) share price has recovered 24% this year after a tough 2023 that saw it fall 40% in the space of 10 months. The £23.8bn bank is the UK’s fourth largest, with 22,000 employees and £453bn in customer deposits.
The performance is among the best seen in the UK banking sector this year, compared with Barclays (up 21.4%) and Lloyds (9%). HSBC has made barely any gains this year, up only 0.1%.
NatWest has a trailing price-to-earnings (P/E) ratio of 5.2, up from 3.7 last November. This indicates the shares may still be undervalued but less so than previously. With earnings forecast to decrease by 24% in the next 12 months, the forward-looking P/E ratio is 7.3. This would bring it more in line with the industry average of 7.7.
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From my perspective, this suggests the share price has good growth potential from here.
But I’ve been checking out analysts’ forecasts from around the web and they aren’t as confident as I am. The average 12-month price target is £2.90 — that’s only an 8.7% increase. But with the price reaching higher highs for the past few years, I see no reason why a break above the previous £3.09 level is not possible.
But wait, there’s more!
NatWest also has the old dividend card up its sleeve.
With a 6.2% dividend yield, shareholders could be paid out pretty well even if the share price trades sideways. But it’s not guaranteed and NatWest doesn’t have the best track record.
Dividends were halted during Covid after an 8.7% yield in 2019. They re-commenced in 2021 at a low 3.7% before jumping to 6.8% in 2022 and then back down to 5.3% the following year.
Right. So not exactly stable.
But earnings per share (EPS) are 52p against a 17p dividend, so the payout ratio is only 35%. That’s low enough that payments are unlikely to be cut. And the yield is forecast to increase to 7% in three years. Relying on dividends can occasionally require a bit of faith but I like the direction of NatWest. Barring any unexpected economic turbulence (which can’t be guaranteed), I expect the yield to stabilise and payments to continue increasing.
Risks
At the moment, the rocky economy remains a key factor that threatens the UK banking sector. When discussing any finance-related shares it simply can’t be ignored — particularly when mortgages are involved. NatWest would certainly take a hit from mortgage defaults if the UK housing market declines. At the same time, an improved economy with reduced interest rates could decrease the bank’s earnings from loans.
Overall, I consider NatWest to have a net positive advantage due largely to the dividend, offset by ongoing economic uncertainty that threatens the banking sector. I’ve been considering adding HSBC to my portfolio recently but now I’ve been swayed towards NatWest. While HSBC is a much larger bank with a higher dividend, I like the growth potential of NatWest and feel it’s at less risk from the geopolitical factors that threaten multinational corporations.
I may have missed the most recent gains but I think there are still more to come. As such, I’ll be adding it to my ever-growing buy list for April.
