My top FTSE 100 stock to buy this September

If I had to pick just one FTSE 100 stock to add to my Stocks and Shares ISA right now it would be NatWest.

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What’s the best FTSE 100 stock to add to my Stocks and Shares ISA this September? Well, I will say NatWest (LSE: NWG): it looks cheap, has an attractive dividend yield, and is forecasted to have impressive earnings growth.

NatWest shares look cheap to me

The most recent consensus forecasts for NatWest’s earnings per share (EPS) in 2022 and 2023 are 32.1p and 38.3p per share, respectively. NatWest shares are currently trading at a forward price-to-earnings ratio (P/E) of 7.9 (2022) or 6.6 (2023), based on a share price of 252p at the time of writing. Given the FTSE 100 average forward P/E is 13.9, NatWest shares look like good value compared to the wider market.

Compared to its peers in the whole financial sector — which has an average P/E of 8.6 — NatWest again looks cheap. I think NatWest is a cheap FTSE 100 stock with above-average benefits to me as a shareholder in terms of its dividend yield and earnings growth prospects.

An attractive dividend

NatWest is forecasted to pay a dividend of 20.9p per share in 2022 and 14p per share in 2023. At 252p per share, that’s a forecasted 2022 dividend yield of 8.1% and 5.6% for 2023. NatWest is a FTSE 100 index stock with a dividend yield comfortably higher than the forecasted index average yield of 3.63%. Also, the banking services industry group’s average dividend yield is 4.39%, which NatWest again beats.

NatWest has already committed to paying an interim dividend of 3.5p per share. A special dividend of 16.8p was approved by shareholders last Thursday, along with a share consolidation. All that remains to be seen is what the final dividend looks like. It won’t have to be much to hit that 8.1% forecasted yield.

So, I have convinced myself that I have found a FTSE 100 stock that looks cheap and has an attractive dividend. But how safe are those dividends? To answer that question, I will need to look at NatWest’s earnings and growth potential.

A FTSE 100 stock for my portfolio

The markets are pricing in rates of 4% by May next year. That should be good for NatWest. In its half-year report, released at the end of July, the bank’s net interest margin — the difference between what it pays depositors and what it lends at — was up, which increased its income. Natwest’s lending activity was also solid, driven partly by strong mortgage growth.

NatWest’s dividends this year will be covered in full by earnings. Next year the forecast is for earnings to grow from 32.1p to 38.3p per share. That should cover dividends by around 2.5 times, which is excellent.

NatWest is doing well with rising rates. But inflation is driving those rate rises. People are starting to struggle with the cost of living in the UK. If NatWest’s customers stop lending and loan defaults start to rise, this will hurt the bank’s bottom line. There is a real possibility this could happen, which would probably cause the share price to slide and perhaps compromise the dividend. However, on balance, I am happy to take risks for the potential rewards with this FTSE 100 stock.

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.

James J. McCombie owns shares in NatWest. 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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