Down 34%! Is this FTSE 100 heavyweight now just too cheap to ignore?

This FTSE 100 stock was battered on fears of a crisis that never happened and on another of its own making, but now looks highly undervalued to its peers.

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Image source: NatWest Group plc

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2023 has not been a good year for FTSE 100 ‘Big Four’ UK bank NatWest (LSE: NWG).

First, it was hit by the fallout from the failure in March of Silicon Valley Bank, and then Credit Suisse. This fanned fears of a new banking crisis and broadly pushed financial stocks down.

In July, it suffered a PR disaster following the ‘de-banking’ of former politician Nigel Farage by its private bank Coutts. Further negative news surrounded the resultant departures of its CEO and then Chairman.

For me though, big share price drop in a fundamentally sound business — which I think NatWest is — offers a great opportunity. I’m seriously considering buying more of the stock.

One risk in the shares is that interest rates fall earlier and faster than predicted. Another risk is a genuine financial crisis that will test liquidity across the banking sector.

However, the March banking crisis looked overdone to me. The UK banking system is much stronger than before the 2007 Great Financial Crisis. Following this, capital requirements were greatly increased and are regularly stress-tested.

For added assurance, the UK government still has a 38.6% stake in NatWest.

As for the loss of the execs who oversaw such a PR disaster, it is a welcome development, in my view.

Undervalued to its peers

Of course, just because a share price has fallen a long way doesn’t necessarily mean it is undervalued. A share price drop can simply reflect that a company is worth less than it was before, for whatever reason.

To ascertain which is the case for NatWest, I compared its price-to-earnings ratio (P/E) with those of its peer group. It trades currently at just 4 – the joint lowest of the group alongside Barclays. Lloyds is 4.2, HSBC Holdings is 5.5, and Standard Chartered is 11.9. This gives a UK bank peer group average of 6.4.

It looks even more undervalued against the European bank peer group P/E average of 7.1.

To work out a fairer value for the shares, I used the discounted cash flow (DCF) valuation method. Given the assumptions involved in this, I used several analysts’ DCF valuations as well as my own figures.

The core assessments for NatWest are now between around 65% and 72% undervalued. The lowest of these would give a fair value per share of about £5.94.

This does not necessarily mean that the stock will reach that point. But it does highlight to me that it currently offers very good value.

Good shareholder rewards

NatWest paid a regular dividend last year of 13.5p per share. Based on the current share price of £2.08, this gives a yield of 6.5%. It compares very favourably to the average FTSE 100 yield of 3.9%.

It also paid a Special Dividend in 2022 of 16.8p. This, added, to the regular dividend, based on the current share price gives a whopping yield of 14.6%.

The bank has not indicated whether it will pay another Special Dividend this year. However, it did increase its interim payment this year by 57% — from 3.5p to 5.5p.

If this was applied to this year’s final dividend, then the total would be 21.2p. Based on the current share price, this would give a stunning 11.6% yield, with no Special Dividend included.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Simon Watkins has positions in Lloyds Banking Group Plc and NatWest Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. 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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