The NatWest share price is rising fast! Am I too late to buy?

Its share price has come back from the depths and NatWest is one of the strongest UK bank stocks in 2024. But is there more room for growth?

| More on:

Image source: NatWest Group plc

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.

Key Points

  • Up 24% this year
  • Dividend yield of 6.2%
  • Risk of mortgage defaults

The NatWest (LSE:NWG) share price has recovered 24% this year after a tough 2023 that saw it fall 40% in the space of 10 months. The £23.8bn bank is the UK’s fourth largest, with 22,000 employees and £453bn in customer deposits.

The performance is among the best seen in the UK banking sector this year, compared with Barclays (up 21.4%) and Lloyds (9%). HSBC has made barely any gains this year, up only 0.1%.

NatWest has a trailing price-to-earnings (P/E) ratio of 5.2, up from 3.7 last November. This indicates the shares may still be undervalued but less so than previously. With earnings forecast to decrease by 24% in the next 12 months, the forward-looking P/E ratio is 7.3. This would bring it more in line with the industry average of 7.7.

From my perspective, this suggests the share price has good growth potential from here.

But I’ve been checking out analysts’ forecasts from around the web and they aren’t as confident as I am. The average 12-month price target is £2.90 — that’s only an 8.7% increase. But with the price reaching higher highs for the past few years, I see no reason why a break above the previous £3.09 level is not possible.

But wait, there’s more!

NatWest also has the old dividend card up its sleeve.

With a 6.2% dividend yield, shareholders could be paid out pretty well even if the share price trades sideways. But it’s not guaranteed and NatWest doesn’t have the best track record.

Dividends were halted during Covid after an 8.7% yield in 2019. They re-commenced in 2021 at a low 3.7% before jumping to 6.8% in 2022 and then back down to 5.3% the following year.

Right. So not exactly stable. 

But earnings per share (EPS) are 52p against a 17p dividend, so the payout ratio is only 35%. That’s low enough that payments are unlikely to be cut. And the yield is forecast to increase to 7% in three years. Relying on dividends can occasionally require a bit of faith but I like the direction of NatWest. Barring any unexpected economic turbulence (which can’t be guaranteed), I expect the yield to stabilise and payments to continue increasing.

Risks

At the moment, the rocky economy remains a key factor that threatens the UK banking sector. When discussing any finance-related shares it simply can’t be ignored — particularly when mortgages are involved. NatWest would certainly take a hit from mortgage defaults if the UK housing market declines. At the same time, an improved economy with reduced interest rates could decrease the bank’s earnings from loans.

Overall, I consider NatWest to have a net positive advantage due largely to the dividend, offset by ongoing economic uncertainty that threatens the banking sector. I’ve been considering adding HSBC to my portfolio recently but now I’ve been swayed towards NatWest. While HSBC is a much larger bank with a higher dividend, I like the growth potential of NatWest and feel it’s at less risk from the geopolitical factors that threaten multinational corporations.

I may have missed the most recent gains but I think there are still more to come. As such, I’ll be adding it to my ever-growing buy list for April.

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. Mark Hartley has positions in Barclays Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, and Lloyds Banking Group 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.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »