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Despite a rising Natwest share price the government has been selling at a loss. Here’s how I’d react.

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Bold Street is deserted during coronavirus lock down, Liverpool, UK.
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The biggest shareholder in Natwest (LSE: NWG) is the UK government. After bailing out RBS as it then was in the financial crisis, the state has been the majority shareholder ever since. With the Natwest share price adding 72% over the past year, a lot of investors feel the shares have positive momentum.

But the bank said it was buying around 5% of all its shares back from the government. That netted the government around £1.1bn. The investment was a strategic one in the first place, but nonetheless the government lost around £1.8bn on the sale compared to its original purchase price.

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Here’s why this happened and what I think it means for the Natwest share price.

A reluctant holder

The government was never keen to be a Natwest shareholder. Its investment was a form of support when the bank was in crisis more than a decade ago. Since then it has repeatedly said it would seek to reduce its stake over time. This was the third such sale to cut the stake. More are planned, with the entire position expected to unwind in the next five years.

As an investor I don’t like getting back less than I put into an investment. But sometimes one decides to cut one’s losses, for example, because there is a big bill due. Public finances have been severely challenged by the pandemic. Raising money by selling shares at a loss is a tactic used by governments who need money, not just private investors.

The last time the government sold the bank’s shares, in 2018, the Natwest share price was higher than it is now. So while there has been strong positive momentum in the share price, maybe spending more time holding on for further recovery didn’t appeal to the government.

Impact for the Natwest share price

I think this news is actually positive overall for the Natwest share price.

First, a reduced government shareholding can also be seen as a vote of confidence in the bank’s management. The government invested when the bank was at risk of collapsing. Selling down the position suggests that the state is now more comfortable with Natwest’s ability to fund and run itself than it was at the time of the last financial crisis.

Secondly, Natwest plans to cancel 390m of the shares it bought back. That is about 3% of its total share float. I see this as positive for the Natwest share price. Fewer shares in circulation means higher earnings per share even if total earnings remain flat.

I’d consider buying Natwest

I’d think about buying Natwest shares for my own portfolio. This latest news makes them more attractive to me. It should be positive for earnings per share. However, the share purchase will cost the bank money and will add a little more pressure on the balance sheet.

Bank dividends are still limited by regulators, but the reinstated dividend means the share yields 1.5%. However, further shocks to the banking system such as pandemic arrears or joblessness could bite into future profits.

Despite its strong run over the past year, I continue to see value in the Natwest share price. While the government is slowly selling over time, I would consider buying.

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christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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