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actions in NatWest Group (LSE:NWG) have been falling of late. Over the last month, the stock is down 9%, which means it has a dividend yield of 5.16%.
That might make it sound like you’d need to invest around £19,000 to earn £1,000 in annual passive income. But that’s not entirely correct: the real figure is a bit lower.
share repurchase
Dividends are one way NatWest shareholders can earn a return on investment. But they’re not the only way the company returns cash to its owners.
Like many banks, NatWest often engages in share buybacks. As a result, the number of shares outstanding has been reduced from 11,083 at the end of 2017 to 9,929 at the beginning of this year.
Buying back shares does two things. It increases the value of the remaining shares, but also allows shareholders to generate passive income by selling part of their stake.
NatWest has reduced its share count by an average of 2.18% per year since 2017. Thus, a shareholder could have sold 2.18% of their investment each year without diluting their stake in the business.
Add this to the current dividend yield, and the total return on passive income available to shareholders is 7.34%.
At that level, the amount you would need to invest to earn £1,000 a year in passive income is not £19,000. Actually there are 13,623.
risks
Stock buybacks are often infrequent and difficult to predict, even more so than dividends. But NatWest has done much more than other UK banks to reduce its share count in the last five years.
However, it’s worth noting that over the last five years, NatWest has done much more to reduce its share count than other UK banks.
| Stock | December 2017 Stock Count | December 2022 Stock Count | % change |
|---|---|---|---|
| NatWest | 11,083 | 9,929 | -10.41 |
| lloyds | 72,393 | 69,682 | -3.74 |
| barclays | 17,284 | 16,867 | -2.41 |
| HSBC | 20,072 | 19,986 | -0.43 |
I think this makes NatWest especially attractive from a passive income perspective. But there are also some important risks to consider.
One of the distinguishing features of the bank is that the UK government still owns around 62% of the company. I see this as a risk from an investment perspective.
Having the government as the main shareholder could make it difficult for NatWest to operate freely. In particular, it finds itself unable to improve its efficiency by cutting staff in the same way that other banks can.
However, I don’t expect this to be a long-term problem. The government has made it relatively clear that it intends to liquidate its stake in the bank, which should give it more flexibility going forward.
Should I buy NatWest stock?
Dividend yields at UK banks are all within 1% of each other. So I think NatWest’s buyback activity makes it the top choice when it comes to passive income.
My plan is to keep an eye on this stock for a while. It’s a volatile time in the banking sector, so I’m going to see what the UK government does with their share as I look for a buying opportunity.
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