Despite the NatWest share price rising 58% in a year, the stock’s still yielding 4.8%
On 7 August, the NatWest Group (LSE:NWG) share price went ex-dividend. This means those holding the bankâs stock before this date are entitled to receive the interim dividend of 9.5p a share, which was paid today (12 September). Add this to the final payout for 2024 of 15.5p and the stockâs yielding an impressive 4.8%. This puts it in the top fifth of FTSE 100 dividend shares.
As an added bonus, the stock’s now changing hands for 2.3% more than just before it went ex-dividend. It’s a win-win for shareholders.
More to come
However, analysts are predicting things will get even better for income investors. Over the next three years, theyâre expecting dividends of 29p (2025), 32.7p (2026) and 36.5p (2027). If theyâre right, this pushes the forward (2027) yield up to an impressive 7%.
Theyâre also predicting share buybacks of around £1.6bn-£1.7bn a year. Although — to be honest — if I was shareholder, Iâd rather have the cash in my hand. However, for its above-average payout, income investors could consider the shares.
But there are never any guarantees when it comes to dividends, especially in the banking sector where earnings can be volatile.
A doubled-edged sword
Although higher interest rates are, generally speaking, likely to improve NatWestâs net interest margin, they also create another potential problem.
Higher borrowing costs increase the risk of loan defaults and losses to the bank. And with its exposure to the domestic economy â at the end of 2024, 90% of its loans were to UK individuals and businesses â it would be particularly vulnerable to an economic downturn here.
The potential impact of this can be seen by comparing the impairment charges in its 2020 and 2024 accounts. In the first year of the pandemic, the bank increased its provision for bad loans by £3.2bn. Last year, it booked a cost of £359m. Okay, Iâm not predicting anything as bad as five years ago, but any slowdown in the economy is likely to have an impact on the bankâs earnings.
Also, its profit could be further damaged by the imposition of a windfall tax — or other levy — as it looks as though the chancellor needs to find additional sources of revenue to balance the nationâs books. We wonât know until November whether Rachel Reeves decides to follow the advice of a number of prominent think-tanks and pressure groups. But it remains a risk.
Not cheap
When it comes to valuation, NatWest has the second-highest price-to-earnings ratio of any FTSE 100 bank. Its price-to-book ratio is the joint highest. This is a concern to me — especially given its reliance on the UK â which means Iâm not interested in taking a stake at the moment.
| Stock | Price-to-earnings ratio | Price-to-book ratio |
|---|---|---|
| Lloyds Banking Group | 12.3 | 1.0 |
| NatWest Group | 8.5 | 1.1 |
| Barclays | 8.4 | 0.7 |
| Standard Chartered | 7.0 | 0.6 |
| HSBC | 6.8 | 0.9 |
| Average | 8.6 | 0.9 |
Although I like the bankâs generous dividend, I fear the recent share price rally â itâs up 58% since September 2024 and itâs risen 375% over the past five years â means itâs no longer the bargain it once was.
Personally, I think there are better opportunities elsewhere.
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HSBC Holdings is an advertising partner of Motley Fool Money. James Beard has positions in Barclays Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
