Will NatWest shares continue their rapid recovery?

NatWest shares have experienced a surge this year. I look at whether there is still room for further growth and whether they should be considered a buy.

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Over the course of the last year, NatWest (LSE: NWG) is one of the top performing companies on the FTSE 100, with an 83% increase in share price during this period. That’s great for whoever was holding from this time last year, but begs the question of whether the banking group can maintain such growth?

The last few months has seen positive news emerge for NatWest that could indicate potential for the business moving forward. The most recent news was the UK government selling part of its stake back to NatWest, which reduced the government’s ownership stake down to 59.8%. Back in February, the company also reinstated its dividend, another reason to be positive on the stock.

On an upward trend

There’s no getting around the fact that NatWest has struggled since the financial crisis of 2008 and it’s on a long, and ongoing, road to recovery. This is shown by the fact that NatWest’s £1.1bn purchase of shares from the UK government represented only the third time that such a transaction had taken place.

By comparison, Lloyds Banking Group was once 43% owned by the UK government, but bought itself entirely out of this position in 2017. Meanwhile, the UK government is likely to retain a position in NatWest until the end of the 2025-26 financial year.

For myself, I see the potential for NatWest to continue its recovery in the years to come, and its turnaround could represent an opportunity to buy at a discount for a long-term hold. Not least because the company cancelled 390m of the shares purchased back from the UK government, which should improve earnings per share. As the company continues to buy shares over the coming years, it will have the option to cancel further shares, again raising earnings per share, and also reducing the number of shares in circulation, potentially raising the price per share.

The restoration of dividend could also encourage investors looking for a steady income to eye NatWest as a potential option, which could drive the share price higher, especially if the dividend returns to previous levels in the coming years.

Further than this, the share price still hasn’t fully recovered from the shock of Covid-19, with shares reaching 250p by the end of 2019, suggesting there’s further room for a quick recovery in the short term. It’s also clear across the UK banking sector that there are broader signs of strength, with both Barclays and Lloyds seeing share prices rise significantly during the last year.

Risk factors

The investment isn’t without risk – the benefit that could be gained as NatWest buys itself out of government ownership will also see it needing to make significant investments moving forward. There is also the double-edged sword of its rising share price, making such purchases more expensive, potentially weighing on its balance sheet.

There are also continuing risks over Covid-19, with the UK government having eased the blow with wage and business subsidy schemes… the full effect on businesses and consumer loans, and potential defaults on these, may not be fully felt until the situation stabilises further.

However, these factors do not stop me from expecting shares in NatWest to continue to rise, and from looking to add the stock to my portfolio for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Ben Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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