NatWest Group (LSE: NWG) announced a special dividend of 16.8p on Friday, taking the market by surprise. It comes as first-half results beat expectations. On top of a 3.5p interim dividend, the bank will pay a total of 20.3p per share. The NatWest share price rose on the news, putting on 8% in early trading.
At the time of writing, an investor would have to pay an extra 17p to get that extra 16.8p special dividend. Shame I didn’t buy yesterday!
Financial strength
My big take is that NatWest is demonstrating its financial strength. It’s in a strong liquidity position, and has plenty of spare cash to hand back to shareholders.
We had a share buyback in the first quarter as well. Combing that with the announced dividends, the bank says it’s redistributing the equivalent of 32p per share.
The Lloyds and Barclays share prices perked up a couple of percent when the market opened, too. Both reported decent underlying performances in recent days. Coupled with the latest from NatWest, maybe investors realise the banking sector might not be in such bad shape after all?
Interest rates
Rising interest rates are good news for lenders. Helped by 2022’s base rate hikes, NatWest lifted its net interest margin by 26 basis points to 2.72%.
It seems likely that UK rates will be raised further before the year is out, too, with the Bank of England’s Monetary Policy Committee next meeting on 4 August. It’s bad news for borrowers, but I’d say the outlook for banking interest margins in the second half must be positive.
NatWest has beefed up its full-year outlook now. It says: “In 2022, we expect income excluding notable items to be around £12.5bn.” That’s up from earlier guidance of around £11bn.
Buy?
So is NatWest a buy for investors now? Well, I’ve seen the banks as cheap buys for ages now. The proof of the banking sector for me lies in the dividends. And Barclays says it intends “to maintain ordinary dividends of around 40% of attributable profit and to distribute a minimum of £1 billion in each of 2022 and 2023.”
Does that sound like a company in a sector that everyone is bearish about, apparently expecting the worst? No, it doesn’t to me either. I don’t understand why the banks have been on such low price-to-earnings (P/E) valuations for so long.
NatWest was on a forecast P/E of under 10 prior to these latest results, falling lower over the following two years. And analysts had the next few years of dividends marked in at around 6% to 6.5% too.
Economy
I’m certainly not suggesting that buying bank shares in such troubled economic times is without risk. No, there’s plenty of that. Over in the US, the economy has now declined for two quarters in a row. And that has the pundits scratching their heads over whether or not there’s really a recession going on.
Markets don’t like this kind of uncertainty, and I reckon bank shares could be in for further shakiness. But for investors, it could well be a buying opportunity!
