Down 24%, is it time to buy this high-yielding FTSE 100 bank stock?

This FTSE 100 bank has been hit by bad publicity, but it posted great H1 results, and paid an 11.4% yield last year, making it look like a bargain to me.

| 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.

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

Image source: Getty Images

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.

A valuation gap has appeared in the shares of FTSE 100 bank NatWest (LSE: NWG), in my view.

Investor attention has been focused on the mishandling of former politician Nigel Farage’s account with NatWest-owned private bank Coutts.

Because of that, the bank’s shares failed to react to its excellent H1 results released on 28 July. These add to the many other positives that are not currently reflected in the share price, it seems to me.

As it stands, this ‘Big Four’ UK bank that yielded 11.4% last year is 24% down since February.

Given recent events, a risk in the shares is for further public relations disasters. Another is for a reversal in the Bank of England’s (BoE) current interest rate-raising policy.

Implicit state guarantee

Before this latest publicity disaster, NatWest shares had fallen on fears of a new banking crisis.

These began with rumours from mid-February of the imminent failure of Silicon Valley Bank. Its collapse in March, followed by that of Credit Suisse, pushed banking stocks down around the world.

However, after the Great Financial Crisis (GFC), UK banks were pressured into maintaining core equity (CET1) capital ratio requirements of over 10%. At the time of the SVB and Credit Suisse failures, NatWest’s CET1 was 14.4%.

And the government still has a 38.6% stake in the bank, as an additional surety.

Going from strength to strength

NatWest’s H1 results showed pre-tax profit of £3.6bn, compared to £2.6bn in the same period last year. This was mainly due to operating in a perfect interest rate environment for banks.

UK interest rates are estimated to keep rising until at least the end of H1 2024. So banks’ net interest margin (NIM) – the difference between earnings from loans and payouts for deposits – will continue to grow.

In NatWest’s case, its H1 NIM was 3.2%, compared to 2.58% in H1 2022.

Stellar shareholder rewards

These bumper profits enabled it to announce an interim dividend of 5.5p per share.

It also intends to begin a share buyback programme of up to £500m in H2. This will be in addition to the £1.3bn directed buyback completed in Q2.

One thing that struck me here was that in 2022, the bank’s interim dividend was just 3.5p. But it ended up paying a yield of 11.4%.

If it stuck to that level, £10,000 invested now would make me £1,140 in passive income in a year. Over 10 years, I would have an extra £11,400 to add to my initial £10,000 investment.

This return would not include further gains from any reinvestment of dividends or share price appreciation. On the flipside, there would also be tax liabilities, of course.

I already have holdings in the sector, but even with these, I am seriously considering buying NatWest shares.

One reason is I think they will recoup all their losses since February over time. This will close the valuation gap that I see.

Another reason is for the healthy yields that I think will stay in place for this year.

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.

Simon Watkins 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

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Should I buy these UK shares for my portfolio?

This Fool has been searching for ways to capitalise on the commodity moves via UK shares. Here’s what he’s watching.

Read more »

Illustration of flames over a black background
Investing Articles

Just released: April’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£9,000 in savings? Here’s a FTSE 100 stock I’d buy to target a £30,652 annual second income!

Our writer highlights one top FTSE 100 share that he thinks could help create a portfolio large enough for a…

Read more »

Light bulb with growing tree.
Investing Articles

62% down! Is the Ceres Power share price now a green energy bargain?

Annual results from the green energy firm showed a company on the cusp of doubling sales. So why has the…

Read more »

Investing Articles

3 mid-cap UK defence shares to consider buying in 2024

Defence budgets are soaring as global conflicts increase the threat landscape, so I'm examining the value proposition of three defence-related…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Hargreaves Lansdown investors have been buying dividend stocks BP and Shell. Should I?

Cherished dividend stocks BP and Shell have outperformed the FTSE 100 index so far in 2024. Paul Summers takes a…

Read more »

Young Asian man shopping in a supermarket
Dividend Shares

A 5% yield? Here’s the 3-year dividend forecast for Tesco shares

Jon Smith flags up the positive momentum for Tesco shares following the release of the full-year results and looks at…

Read more »

Investing Articles

Yields up to 12.3% 3 top shares investors should consider for a second income

Searching for ways to make a market-beating second income? These popular dividend stocks are worth serious consideration, says Royston Wild.

Read more »