Image source: NatWest Group plc
He NatWest (LSE:NWG) The share price has recovered 24% this year after a difficult 2023 which saw it fall 40% in the space of 10 months. The £23.8bn bank is the UK's fourth largest, with 22,000 staff and £453bn in customer deposits.
The performance is among the best seen in the UK banking sector this year, compared to Barclays (up to 21.4%) and Lloyd's (9%). HSBC has barely made any progress this year, with an increase of just 0.1%.
NatWest has a price-to-earnings (P/E) ratio of 5.2, up from 3.7 last November. This indicates that the stock may still be undervalued, but less so than before. With earnings expected to decline 24% over the next 12 months, the forward P/E ratio is 7.3. This would put it closer to the industry average of 7.7.
In my view, this suggests that the share price has good growth potential from now on.
But I've been checking analyst forecasts all over the web and they're not as sure as I am. The average 12-month price target is £2.90, which is just an 8.7% upside. But with the price reaching highs in recent years, I see no reason why it couldn't be possible to break above the previous level of £3.09.
But wait, there is more!
NatWest also has the old dividend card up its sleeve.
With a dividend yield of 6.2%, shareholders could be paid quite well even if the share price trades sideways. But it's not guaranteed and NatWest doesn't have the best track record.
Dividends were paused during Covid after an 8.7% yield in 2019. They resumed in 2021 with a low of 3.7% before jumping to 6.8% in 2022 and then falling again to 5.3 % Next year.
Good. So it's not exactly stable.
But earnings per share (EPS) are 52p against a dividend of 17p, so the payout ratio is only 35%. That's low enough that payments are unlikely to be cut. And the yield is expected to increase to 7% in three years. Relying on dividends can sometimes take a bit of faith, but I like the direction of NatWest. Barring unexpected economic turbulence (which cannot be guaranteed), I expect performance to stabilize and payouts to continue to increase.
Risks
For now, the faltering economy remains a key factor threatening the UK banking sector. When talking about finance-related stocks, it simply cannot be ignored, especially when it comes to mortgages. NatWest would certainly be hit by mortgage defaults if the UK property market falls. At the same time, an improving economy with reduced interest rates could decrease the bank's profits from loans.
Overall, I see NatWest as having a positive net upside largely due to the dividend, offset by the current economic uncertainty threatening the banking sector. I've been considering adding HSBC to my portfolio recently, but have now leaned towards NatWest. While HSBC is a much larger bank with a higher dividend, I like NatWest's growth potential and feel it is less at risk from the geopolitical factors that threaten multinational corporations.
I may have missed the most recent gains, but I think there is more to come. As such, I'll be adding it to my ever-growing shopping list for April.
