The NatWest Group (LSE: NWG) share price has been on a tear. Since November 2023, it’s up 85%. And it shows no sign of stopping.
Do I think it’s still too cheap? You bet I do. NatWest is high on my 2024 Stocks and Shares ISA candidates list, and I want to tell you why.
Resurgent bank
We’ve come a long way since the days of the banking crash. Back then, NatWest was known as Royal Bank of Scotland, and it was the biggest casualty of them all.
It wouldn’t be here today without a taxpayer bailout. And even now, the government still holds close to 28% of the shares. But it’s selling them, which will see the bank finally back to full free-market ownership. That has to be good.
Before I get too excited about what I see as a cheap stock, there are risks ahead, which potential buyers need to watch out for.
Falling 2024 earnings
Bank earnings are falling in 2024, as high interest rates keep borrowing under pressure. How Bank of England rate cuts, expected later in the year, will affect the banks is still debatable. They should ease the mortgage market, but also cut into banks’ interest margins.
NatWest itself saw pre-tax profit fall by 27% in the first quarter.
On top of that, global economists are predicting more pain for longer, and UK growth forecasts look slim.
Still, at Q1 time, NatWest stuck to its outlook guidance. So we could see a 12% return on tangible equity (RoTE), rising above 13% by 2026. And 2024 income, excluding exceptionals, of £13bn to £13.5bn. I’d be happy with that.
Wonderful company, fair price?
So, is NatWest what top investor Warren Buffett might call a wonderful company at a fair price? Looking at today’s valuation, I think it just might be.
Broker forecasts put NatWest shares on a price-to-earnings (P/E) ratio of only about 8.4. And with earnings expected to get back to growth in the next couple of years, that could drop under seven by 2026.
On top of that, the 5.3% forward dividend yield for 2024 could reach 5.7% in the same time.
Yes, the financial outlook is still tight and the sector is risky. But isn’t the fear already built into that low stock valuation? I think it is.
Cash returns
On top of the dividend, NatWest announced a new share buyback with 2023 FY results in February. It should reach up to £300m. And it would mean total distributions of around 40p per share for the full year.
For shares priced at 326p (at the time of writing), I rate that as pretty good. And that’s even after the price rocket of the past few months.
So, will I buy NatWest shares for my ISA? I’ll make that decision when I have the money. But right now, it’s firmly among the favourites.
