The NatWest (LSE:NWG) share price has more than doubled in price over the past three years. As I noted above, it has certainly surprised a few investors. Myself included.
When buying a house around two years ago, I was forced to choose a few stocks to sell. Sadly, I sold NatWest and kept two other UK banks. I had really gone to town on British banks following the Silicon Valley Bank fiasco.
And I say “sadly” because the stock has really surged since then. I believed the government stake would mean the stock would appreciate more slowly than peers. But that government stake’s now gone entirely.
The government’s large, gradual sell-down of its stake kept a persistent overhang on the stock. This limited its appreciation in recent years because investors anticipated ongoing share sales would suppress the share price. In turn, it dampened demand.
Not clearly cheap
NatWest’s valuation for the coming years appears undemanding. The shares are trading on a forward price-to-earnings (P/E) ratio of 9.3 times for 2025. This moderates to 8.4 times in 2026 and 7.7 times by 2027.
The forecast dividend per share is set to rise from 28.8p in 2025 to 32.3p in 2026 and 35.6p in 2027, translating to forward yields of 5.5%, 6.1%, and 6.7% respectively, with coverage ratios consistently just above two, indicating that the payout’s well supported by earnings and should be sustainable even if profits fluctuate.
While these metrics suggest the shares aren’t expensive, I wouldn’t expect NatWest to trade at much higher multiples given the sector’s structural challenges and the lack of a clear catalyst for a re-rating. Or simply, UK banks don’t typically trade with higher earnings multiples.
As such, any material appreciation is likely to depend on the bank delivering growth beyond the current forecast period or a broader revaluation of UK financials. And with UK economy growth expected around 1% in 2025 and 1.5% in 2026, I’d be surprised to see UK financials broadly trade with stronger multiples despite the unwinding of the structural hedge.
The pros and cons
The bank’s still discounted versus peers in the US, and that could be a plus for value investors who believe in a resurgent British economy. Likewise, the dividend yield’s impressive, rising to 6.7% in 2027 based on today’s share price.
However, there are certainly risks to buying a stock at its peak, especially when the valuation’s broadly in line with peers and there aren’t any really obvious positive catalysts on the horizon. In fact, I do have some concerns about negative catalysts as the impact of Trump’s trade policy hasn’t properly trickled through to global earnings yet. And that matters to NatWest because banks are typically barometers of the economy.
Personally, I believe there’s probably better value elsewhere on the market. I’m not planning to buy NatWest shares anytime soon.
