As Fools, we’re always on the hunt for cracking value opportunities in the market. One company that’s recently caught my eye is NatWest (LSE:NWG), the FTSE 100 banking behemoth. After crunching the numbers, I reckon the banking giant could be a tempting morsel for us value-hungry investors. Here’s why I’m considering adding it to my portfolio.
A bargain in plain sight?
Over the past year, the shares have been on a tear, soaring 63%. That’s not just beating competitors in the UK banking sector, up an average of 18.8%, it’s absolutely trouncing them. While we Fools know past performance doesn’t guarantee future results, this impressive showing suggests management might have found its mojo after an uncertain few years.
A discounted cash flow (DCF) suggests the shares are trading at a whopping 55.8% discount to estimates of its fair value. Although it’s not a guarantee any time soon, that’s the kind of number that makes value investors like myself sit up and take notice.
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With a price-to-earnings (P/E) ratio of just 6.8 times, the company also looks pretty cheap compared to the broader market, and many of its banking rivals. And let’s not forget the price-to-book (P/B) ratio of 0.8 times. When a P/B dips below one, it often means the market’s valuing it at less than the book value of its assets. While we need to tread carefully with bank valuations, due to the complexity of the sector, this low P/B ratio certainly gets me thinking.
The recent financial results have been impressive. In its second-quarter 2024 earnings report, the bank pulled a rabbit out of the hat by beating expectations on both earnings per share and revenues. This shows the underlying business is firing on all cylinders.
Over the trailing 12 months, the business raked in earnings of £4.19bn on revenues of £13.75bn. With a net profit margin of 30.44%, it’s clear management knows how to turn a pretty penny for its shareholders.
Healthy dividend
For us dividend-lovers, the business is serving up a yield of 4.9%. With a payout ratio of 37%, the dividend looks well-covered, leaving plenty of room for potential future increases.
However, let’s not get carried away, Fools. The dividend history has been about as unpredictable as British weather. History has shown us that banking dividends can be a roller-coaster ride, especially when the economy takes a tumble.
Risks on the horizon
So, let’s not get too carried away. Every investment comes with risks, and NatWest is no exception. Analysts are forecasting earnings to dip by an average of 1.1% per year for the next three years. That potential earnings wobble could put the squeeze on the shares and dividends if it comes to pass.
And let’s not forget, banks are as cyclical as the seasons. Any major economic downturn could give the company a nasty bruising.
Ticks the boxes for me
Despite these bumps in the road, I reckon NatWest could be a tasty addition to my Foolish portfolio. The combo of a bargain valuation, solid financials, and a dividend that could make my wallet smile is mighty tempting.
For Fools willing to ride out some cyclical waves and potentially uneven growth, this FTSE 100 giant of the banking world could be worth a closer look. I’ll be adding shares at the next opportunity.
