Is NatWest still one of the best FTSE 100 shares to buy now? Here’s what the charts say…

After a 40% rise, is there still an opportunity to buy one of the best-performing FTSE 100 shares of 2024? These charts indicate there might be.

| 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.

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.

A general election has caused the UK government to postpone its plans to sell its stake in NatWest (LSE:NWG). But could it be a good time for investors to buy shares anyway?

Created with Highcharts 11.4.3NatWest Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL5 Jun 20195 Jun 2024Zoom ▾Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '242020202020212021202220222023202320242024www.fool.co.uk

The best way to invest involves finding above-average businesses and buying shares when they trade at below-average prices. And NatWest looks like it still fits the bill here – at first sight, anyway. 

Benchmark

Right now, the average FTSE 100 company achieves an 11% return on equity (ROE). And investors are paying an average of £1.80 for every £1 in equity, implying a price-to-book (P/B) ratio of 1.8. 

Should you invest £1,000 in NatWest Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group made the list?

See the 6 stocks

NatWest currently looks better than the average on both counts. It achieves an ROE of 12.35% and despite its share price being up significantly, the stock trades at a P/B of 0.8. 

If only investing was so straightforward. Unfortunately, the current ROE is unusually high – NatWest hasn’t previously achieved this level of profitability at any point during the last 10 years.


Created at TradingView

Assuming the bank is going to achieve an above-average ROE in the future thus seems risky. But the stock does trade at a much lower P/B ratio than the broader index, so could it still be a bargain?

Valuation

NatWest is achieving unusually good returns, but its price-to-book ratio is also higher than it has been for some time. Over the last 10 years, the stock has generally traded at a P/B ratio of below 0.75.


Created at TradingView

Investors are therefore expecting the company to do better than it has done over the last decade, but worse than the index in general. I think this might be justifiable.

The big issue for NatWest is that interest rates are likely to fall from their current levels. This is likely to have a negative impact on margins, causing the bank’s ROE to fall below the 11% average. 

Nonetheless, a return to pandemic rates probably isn’t on the cards. So there’s reason to think the stock ought to trade at a higher P/B multiple than it did during Covid.

Outlook

NatWest’s ROE might be about to fall. But its discounted P/B ratio means it has a long way to fall before it’s worse value than the FTSE 100 average. 

Based on today’s metrics (11% ROE divided by a 1.8 P/B ratio), the FTSE 100 is offering an earnings yield of approximately 6%. By these standards, NatWest might still be cheap.

With a P/B ratio of 0.8, the company only needs to achieve an ROE of 4.8% to match the index. And that might well be achievable even if interest rates come down from their current levels.  

Of course, if rate cuts take longer than expected to materialise, there’s a possibility that returns could stay high. But even without this assumption, NatWest shares look like decent value.

Growth

The FTSE 100 probably has better growth prospects, with the likes of Bunzl, Halma, and Diploma in its lineup. But I wouldn’t discount NatWest entirely here.

Dividends and share buybacks give the company scope to boost investor returns over time even if earnings growth is relatively muted. I think the stock is still worth considering at these levels.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl Plc and Halma 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

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »