FTSE 100 bank NatWest (LSE: NWG) has come a long way from the dark days of the 2007/08 financial crisis.
At that point, the UK government took an 84% stake in the bank as part of a wider bailout. This included a dramatic shoring up of its capital base and solvency ratios – along with other UK banks. These institutions are now in a better position to withstand new market shocks such as those being seen now.
The UK government is so confident in NatWest’s future that it reduced its holding to 9.99% in December. And Chancellor Rachel Reeves confirmed it will fully relinquish its holding by 2026.
So, I am wondering whether it is worth my while buying more stock ahead of that milestone.
Is business booming?
A risk to NatWest is a continued reduction of UK interest rates, which could damage its net interest income (NII). This is the money made from the difference in interest charged on loans and received on deposits.
However, its 2024 results saw NII actually rise year on year – by 2% to £11.275bn. Much of this came from lending more and from using products that offset interest rate risk.
Overall, profit for the year increased by 3.9% to £4.811bn.
More broadly, NatWest added around 500,000 new customers in 2024 to push its total to over 19m. It also saw growth in each of its three main businesses — Retail, Commercial & Institutional, and Private banking.
Analysts forecast its revenue will increase by 5.6% a year to the end of 2027. And they project its earnings will rise annually by 4.3% to the same point.
Revenue is the total money a business receives, while earnings are the money left after expenses.
Increased shareholder rewards
NatWest said it would increase its dividend payout ratio from around 40% to around 50% from 2025. This ratio is the percentage of net income a firm pays out in dividends.
It also lifted its dividend for 2024 by 26% to 21.5p. This generates a dividend yield on the current £4.14 share price of 5.2%.
However, consensus analysts’ projections are that the dividends will rise to 28.1p in 2025, 30.3p in 2026 and 34.4p in 2027.
These will generate respective yields on the present share price of 6.8%, 7.3% and 8.3%.
The latter yield is much more than my minimum 7%+ requirement for my passive income stocks. This is money earned with little effort on my part and is geared to providing me with a comfortable retirement.
Do the shares look a bargain to me?
NatWest’s price-to-earnings ratio of 7.9 looks cheap compared to its competitors’ average of 8.1. These comprise Barclays at 6.7, HSBC at 7.5, Standard Chartered at 8.1, and Lloyds at 10.
To establish where the bank’s share price should be, based on expected future cash flows, I ran a discounted cash flow (DCF) analysis.
Using other analysts’ figures and my own, the DCF for NatWest shows that the stock is 62% undervalued right now.
Consequently, the fair value for the shares is £10.89, although prices can go down as well as up. Given this extreme undervaluation in my view and rapidly rising yield forecasts, I will buy more NatWest shares very soon.
