NatWest (LSE: NWG) shares have been shooting the lights out. And about time too.
The FTSE 100 banking group, in its former incarnation as Royal Bank of Scotland, took Britain to the brink in of Armageddon in 2008. That’s not me saying that but late Chancellor Alistair Darling, who had to clear up the mess left by disgraced former boss Fred Goodwin.
What followed was more than a decade of laborious clean-up, while the share price barely budged.
I wrote about NatWest for the Fool regularly during that period, sifting through the wreckage for signs of life. One thing I learned is that recovery stocks can remain unpopular for years. Patience is essential and rewards far from guaranteed. But when sentiment finally shifts, the gains can be spectacular.
Stellar turnaround
That shift came in February last year when CEO Paul Thwaite reported a 20% jump in operating profit, a return on tangible equity of 17.8%, and £3.6bn for shareholders via dividends and share buybacks. After a brief pause to absorb those figures, the share price doubled across 2024.
Someone who invested £10,000 exactly one year ago (24 May 2024) would have enjoyed growth of 70% by now. With a trailing dividend yield of 4.1%, their total return would be closer to 75%, lifting that stake to £17,410. Not a bad outcome in 12 months.
The truly brave saw the best opportunity in 2020 during the pandemic. Since then the stock has surged 366%, turning £10,000 into £46,600, and that’s before dividends.
Solid numbers
NatWest’s first-quarter results, published on 2 May, showed operating profit before tax jumped 38% to £1.8bn, beating consensus of £1.6bn. Underlying returns on capital remain strong and mortgage lending held up well.
The government’s legacy stake in the bank has now fallen below 2% from almost 84% at nationalisation.
Thwaite’s in an ambitious mood, having reportedly tabled an £11bn offer for Santander’s UK division.
Like its peers, NatWest is pressing the Treasury to remove ring-fencing rules that separate customer banking from riskier investment activities. If they succeed, this could bring more investor rewards although, arguably, with more risks.
Analysts’ view
NatWest still trades on a modest price-to-earnings ratio of 9.98, well below the 15 regarded as fair value. The forecast yield’s 5.4%, nicely covered 2.1 times by earnings. Analysts expect operating margins of 46.8% for the year ahead, reflecting tight cost control.
The 18 analysts serving up one-year share price forecasts have produced a median target of just over 562p. If correct, that’s a modest increase of around 7.5% from today. Combined with dividends, that implies total return of 12.9%.
NatWest shares are likely to idle after such a stellar run. Investors considering the stock today must factor this into their plans. The UK (and global) economy is shaky, and tariff threats linger. Rising inflation and bond yields could drive up mortgage rates and drag on the housing market, hitting growth and returns.
Despite these concerns, I think NatWest shares are well worth considering. Over the years, the growth and income should potentially compound nicely. With luck, investors won’t need to wait as long this time.
