A decade ago, NatWest (LSE:NWG) shares (formerly Royal Bank of Scotland) were still recovering from the aftermath of the global financial crisis and government bailout. A £10,000 investment in NatWest shares 10 years ago would now be worth approximately £12,400, excluding dividends. While that’s hardly a market-beating performance, it’s not a disaster either. Especially considering the bank’s turbulent history and the challenges faced by the UK banking sector.
Importantly, this figure doesn’t include dividends. NatWest has been a fairly consistent dividend payer over the period with the exception being the pandemic years. Factoring in reinvested dividends, the total return would be meaningfully higher, though still trailing the FTSE 100’s best performers.
What’s behind the fluctuations?
NatWest’s share price journey over the past decade has been anything but smooth. Several major events have shaped its performance:
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- Brexit: The 2016 referendum and subsequent uncertainty hit UK-focused banks hard. NatWest’s share price suffered as investors worried about economic growth and the future of London as a global financial centre.
- Covid-19: The 2020 crisis led to a sharp sell-off in bank stocks, as fears over loan defaults and ultra-low interest rates weighed on the sector. NatWest’s shares nearly halved in value during the worst of the pandemic.
- Interest rate cycle: The recent surge in interest rates has been a game-changer for banks. Higher rates boost net interest income, which is the difference between what banks earn on loans and pay on deposits. As a result, the bank’s earnings have improved dramatically. Coupled with falling default concerns and an improving economy, NatWest shares have surged.
Still worth considering?
Shares in the bank have truly surged over the past 18 months. While I normally don’t have any issues investing in surging stocks, this is a bank. Banks are typically cyclical stocks and it’s unusual to see a sustained appreciation of the share price.
Despite the recent rally, NatWest shares still trade at a reasonable valuation. The forward price-to-earnings (P/E) ratio is around 7.8, and the price-to-book (P/B) ratio is just under one. These metrics suggest the stock is not expensive relative to its earnings and assets.
Dividends have become a key part of the NatWest investment story. The bank’s payout ratio has increased, with directors recently confirming plans to return around 50% of earnings to shareholders from 2025 onwards.
The current yield is about 5%, with forecasts suggesting this could rise to nearly 7% in the coming years. This makes NatWest one of the more attractive dividend payers in the FTSE 100.
Risks and opportunities
While the outlook is brighter than it’s been for years, risks remain. The UK economy is still fragile, and any sharp downturn or unexpected policy changes could hit profits. Political uncertainty, including the potential impact of US trade policy, could also weigh on sentiment. However, with the government’s stake in NatWest now below 7%, the bank is returning to full private ownership, giving it more flexibility for dividends and potential acquisitions. Recent deals, such as the purchase of Sainsbury’s Bank assets, suggest NatWest is keen to grow.
With a low valuation compared to US peers, rising dividends, and renewed growth prospects, NatWest may still offer value for investors. However, I’m not adding NatWest to my portfolio. I think there may be better examples of undervaluation in the current market.
