It’s not easy coming up with accurate dividend forecasts. As dividends are a distribution of earnings to shareholders, for forecasts to be worth the paper they’re written on it’s necessary to correctly model how a business is likely to perform.
Fortunately, there are analysts that are paid to crunch the numbers. And before NatWest Group (LSE:NWG) released its 2024 results this morning (14 February), the consensus of 16 of them was for a full-year dividend of 19.4p.
However, as a result of a “strong financial performance” against an “uncertain external backdrop”, the bank was able to do better than this. After declaring a final payment of 15.5p, the total payout for 2024, will be 21.5p.
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That’s 10.8% higher than analysts were expecting.
And it implies a current yield of 5%, comfortably ahead of the FTSE 100 average of 3.6%.
NatWest’s directors also confirmed that, with effect from 2025, they intend to increase the proportion of earnings paid in dividends, from 40% to around 50%. This is something the ‘experts’ weren’t expecting. Prior to the news, they were forecasting a payout ratio of 39.7% (2025), 41.1% (2026), and 44.5% (2027).
Even the most optimistic dividend forecast for 2025 (24p) now looks to be on the low side. Next year, earnings per share are expected to be 54.1p. Returning half of this to shareholders would result in a payout of 27p.
Reasons to be cautious
But it’s important to remember that it’s impossible to guarantee dividends. Should earnings fall, one of the first things to be cut is the payout. Indeed, during the pandemic, the bank slashed its dividend dramatically.
And NatWest’s financial performance is heavily dependent on the fortunes of the wider UK economy. Like all banks, it’s vulnerable to bad loans. Any worsening of economic conditions could lead to an increase in the number of customers unable to repay their borrowings.
However, despite these concerns, the bank’s share price has doubled over the past year.
This is a strong performance, especially given that the government’s been selling its stake that it took during the financial crisis.
At 31 December 2023, it held 37.97% of the bank’s shares. A year later, this had fallen to 9.9%. And yet despite this selling pressure, NatWest’s shares have been the second-best performer on the FTSE 100, over the past 12 months.
A great result
In my opinion, I think this morning’s results show the bank to be in good shape.
During 2024, its return on tangible equity was an impressive 17.5%. For comparison, Barclays reported a figure of 10.5%.
And its balance sheet remains strong, which should help underpin the anticipated growth in earnings and support the healthy dividend.
Therefore, on balance, I feel income investors should consider adding NatWest to their portfolios.
