FTSE 100: is NatWest’s cheap share price a brilliant bargain?

I’m scouring the FTSE 100 for the best cheap stocks to buy for my portfolio. Is the NatWest share price low enough to tempt me to invest?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

On paper, it seems as if NatWest Group (LSE: NWG) could be too cheap for me to miss. The FTSE 100 bank trades on a forward P/E ratio of 11.2 times. It also carries a 4.1% dividend yield, much better than the 3.5% Footsie average.

Fans of NatWest argue that things are looking up for the bank as the economic recovery continues and central banks raise rates. Indeed, the share price was up 2.7% Wednesday as traders expect the Federal Reserve to get tough on raising rates after it meets later today. Such talk leads to speculation that the Bank of England will follow a similar path.

Higher rates will be good for NatWest as it’ll increase the profits it can make on lending. This FTSE 100 share has risen 66% over the past 12 months as investors have responded to Britain’s improving economy and the prospect of multiple rate hikes by the Bank of England.

However, it’s my belief that buyers may have been getting a bit carried away. To my mind, the risks of buying the shares remain significant.

Covid-19 and Brexit threats

The ongoing threat of Covid-19 to bank earnings is something I think NatWest’s rampant price rise doesn’t reflect. Sure, vaccination rates in the UK are higher than the global average. But the steady emergence of coronavirus variants remains a massive danger to economically-sensitive stocks like this. BA.2 is the latest rapidly-spreading variant to spook the medical community.

More virus mutations could be coming down the pipe too to threaten the global economic rebound. This has the potential to not only damage expected revenues growth at banks like NatWest and push up bad loans. The economic consequences of a worsening Covid-19 crisis could also prompt central banks to ditch plans for strong and sustained rate rising.

It wouldn’t be a surprise to me to see the share price reverse sharply then. But its troubles stretch beyond the possibility of coronavirus-related turbulence in the short to medium term because of Brexit.

The Centre for Economics and Business Research says that Covid-19 and Brexit have cost the UK economy similar amounts running into hundreds of billions of pounds. However, the body warned that Brexit-related bills are now rising at a faster pace.

Why I’d ignore NatWest and buy other stocks

I also worry for it because the competitive pressures it faces are increasing rapidly as well. Challenger banks such as Revolut and Starling Bank have been steadily eroding the customer bases of traditional banks like these with their digital-led operations over the past decade. ‘

Buy-now-pay-later specialist Klarna’s decision to roll out a payments card that can be used in physical stores adds another significant danger to NatWest and its peers.

So while the share price is cheap, I think its low cost reflects the broad spectrum of dangers it faces. I’d rather buy other UK shares today. There are plenty of other cheap British stocks for me to choose from, after all.

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 assessed. Consider taking independent financial advice.

Royston Wild 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.

More on Investing Articles

Investing Articles

How much does an investor need in a Stocks and Shares ISA to earn £1,000 a month in passive income?

A Stocks and Shares ISA's a valuable asset for investors. Not having to pay dividend tax can be a big…

Read more »

Investing Articles

9% dividend yield! Could buying this FTSE 250 stock earn me massive passive income?

Assura looks like an outstanding stock for dividend investors to consider. But is the 9% dividend yield the passive income…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Why I think this month could be critical for the Lloyds share price!

Our writer explains why he thinks the bank's 2024 results will have a significant impact on the short-term direction of…

Read more »

British Pennies on a Pound Note
Investing Articles

This former penny share has soared 168%. Is the best yet to come?

When Christopher Ruane saw a penny share as a potential bargain last year, he was spot on. So having not…

Read more »

Mature couple at the beach
Investing Articles

£20k in an ISA? Here’s how it could generate £1 of passive income every hour — forever

With a long-term approach, Christopher Ruane explains how an investor could aim to earn a pound per hour in passive…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

FTSE shares: overpriced or still a bargain?

Christopher Ruane reckons a storming FTSE 100 performance of late doesn't tell us much about whether there are still possible…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Would an investor have made money investing £2k in NIO stock 5 years ago?

Our writer looks at how NIO stock has performed over recent years and weighs the bull and bear cases as…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

5 steps to start buying shares with £5 a day

In a handful of steps, our writer explains how someone new to the stock market could start buying shares for…

Read more »