The NatWest Group (LSE: NWG) share price has had a stellar run. Given the misery inflicted on investors in the 15 years after the financial crisis, its return to form is frankly eye-popping.
Shares in the FTSE 100 bank are up 43% over the last 12 months. Over five years, they’ve grown a fabulous 363%.
Investors have pocketed dividends too, with a trailing yield of 4.13%. That figure actually underrates the generosity, since the yield has been squeezed by the share price growth.
Profits, guidance and buybacks
So what’s driving this? NatWest has been helped by solid earnings, the sale of the government’s final stake and a broadly supportive environment. Other high street banks have enjoyed a strong run too.
In May, the government finally sold the last of its stake in the bank, ending one of the most expensive bailouts in UK corporate history. That’s made for a clearer future.
On 25 July, NatWest posted better-than-expected interim results and threw in a new £750m share buyback. Pre-tax operating profits rose 18% to £3.6bn for the half-year, comfortably ahead of expectations. The dividend was raised a mighty 58% to 9.5p.
It also bumped up guidance. Return on tangible equity is now forecast to hit 16.5%, with full-year income above £16bn. That’s up from earlier guidance of £15.2bn to £15.7bn. The bank’s structural hedge is also playing its part. With low-yielding assets being reinvested at 3.7%, it’s expected to deliver £1bn of income this year alone.
Risks and realism
Despite the recent surge, there are risks. NatWest shares dipped slightly after the results as Shore Capital warned on 28 July that strong recent returns will be hard to sustain.
The UK economy is proving sticky, house prices aren’t exactly booming and profit margins on mortgages are being squeezed. If the Bank of England cuts interest rates later this year, margins could be squeezed too. And the government is coming under pressure to hit banks with fresh taxes in the autumn Budget.
Growth and income forecast
With the stock trading around 521.4p, analysts have a median 12-month price target of 588.8p. That’s a potential rise of nearly 15%. Pretty good given the strong recent run.
The dividend forecast is just as interesting. The projected yield for this year is 5.76%. Add that to a possible share price gain, and total returns could be north of 20%. The yield is forecast to hit 6.46% next year.
So is NatWest expensive as a result? No. The current price-to-earnings ratio is just 10.04, with a forecast P/E of 8.7. The price-to-book ratio has risen to around 0.96, from about 0.6 last year. It’s no longer a bargain-bin share, but still not overpriced either.
Of the 20 analysts covering the stock, 15 rate it a Buy and five say Hold. No sellers.
I’m always cautious about chasing a share after a strong run. But given the outlook, I think NatWest is worth considering today. If the market wobbles in August, as many suspect it might, it could become even more tempting.
