Image source: NatWest Group plc
As Fools, we are always on the hunt for value opportunities in the market. One company that caught my eye recently is NatWest (LSE:NWG), the FTSE 100 Index The banking giant. After crunching the numbers, I think the banking giant could be a tempting morsel for value-hungry investors. Here's why I'm considering adding it to my portfolio.
A bargain at first glance?
Over the past year, the stock has been on a tear, up 63%. That doesn't just beat competitors in the UK banking sector, which are up an average of 18.8%, it beats them outright. While we fools know that past performance is no guarantee of future results, this impressive performance suggests management might have found its mojo after an uncertain few years.
A discounted cash flow (DCF) ratio suggests the stock is trading at a whopping 55.8% discount to estimates of its fair value. While it's not a guarantee for the near future, that's the kind of number that makes value investors like me take notice.
With a price-to-earnings (P/E) ratio of just 6.8 times, the company also looks quite cheap compared to the broader market and many of its banking rivals. And let’s not forget the price-to-book (P/B) ratio of 0.8 times. When a P/B falls below one, it often means the market is valuing it below the book value of its assets. While we need to tread carefully with bank valuations, due to the complexity of the sector, this low P/B ratio certainly gives me pause.
Recent financial results have been impressive. In its Q2 2024 earnings report, the bank pulled a rabbit out of the hat by beating expectations on both earnings per share and revenue. This shows that the underlying business is firing on all cylinders.
Over the past 12 months, the company made a profit of £4.19 billion on revenues of £13.75 billion. With a net profit margin of 30.44%, it is clear that management knows how to get a good return for its shareholders.
Healthy dividend
For dividend lovers, the company offers a yield of 4.9%. With a payout ratio of 37%, the dividend appears to be well covered, leaving plenty of room for potential future increases.
Let's not get carried away though, fools. The history of dividends has been as unpredictable as the British weather. History has shown us that bank dividends can be a rollercoaster ride, especially when the economy is faltering.
Risks on the horizon
So let's not get too carried away with excitement. Every investment carries risk and NatWest is no exception. Analysts expect profits to fall by an average of 1.1% a year over the next three years. Such a potential drop in profits could put pressure on the stock and dividends if it materialises.
And let's not forget: banks are as cyclical as the seasons. Any major economic crisis could seriously affect the company.
It ticks all the boxes for me
Despite these bumps in the road, I think NatWest could be a good addition to my Foolish portfolio. The combination of a bargain valuation, solid financial results and a dividend that could make my wallet smile is very tempting.
For the foolhardy willing to ride out some cyclical waves and potentially uneven growth, this FTSE 100 giant of the banking world might be worth a closer look. I'll add shares at the next opportunity.
