Why this FTSE banking gem may hold a lot more value than we think

FTSE 100 banking heavyweight NatWest (LSE) is trading around a 17-year high. But I think there is still enormous value in the stock.

Robust results, rising shareholder rewards, and growth fundamentals all underpin this view.

So, how high could the shares go?

What’s the stock’s ‘fair value’?

A discounted cash flow analysis shows the shares are 43% undervalued at their current £6.18 price. This is despite its strong bullish run.

The method uses cash flow forecasts for the underlying business to identify a stock’s true worth (or fair value).

Therefore, the fair value of NatWest’s shares right now is £10.84.

Comparisons of key stock measures with its peers provide secondary confirmation of this underpricing.

The key price-to-earnings ratio shows the bank at 9.7 – bottom of its competitor group, which averages 13.1. These peers comprise Barclays at 10, Standard Chartered at 11.1, HSBC at 14.8, and Lloyds at 16.6.

Strong recent results

NatWest’s H1 2025 results released on 25 July saw operating profit before tax rise 18.4% year on year to £3.585bn.

Return on tangible equity (ROTE) jumped from 16.4% to 18.1%. Broadly, a higher ROTE indicates a company is more efficient at generating profits from its core, tangible assets. 

Shareholder rewards were dramatically improved as a result. The dividend was boosted 58% to 9.5p, and a £750m buyback was announced (these tend to support share price gains). 

These numbers followed the positive 30 May statement that NatWest had returned to full private ownership. This marked the end of the troubles it had experienced during the 2007/08 financial crisis that required a government bailout.

Meanwhile, its Q3 results published on 24 October showed profit before tax soar 30.4% to £2.18bn. This came on the back of a 15.7% increase in total income to £4.33bn. ROTE rose to 22.3%.

A risk to the bank’s future growth remains increasing competition in the sector, including from challenger banks. That said, in its Q3 report, NatWest upgraded its 2025 income guidance to “around £16.3bn” from around £15.8bn previously. This reflected expectations for stronger lending growth and improved margins.

The bank also upgraded its full-year ROTE guidance to over 18% from around 16% earlier.

Sharply rising divided yield?

Following the big hike in 2025’s interim dividend, analysts forecast more of the same in the coming years.

In 2024, NatWest paid a total dividend of 21.5p. On the current £6.18 share price, this yields 3.5%. This is perfectly respectable, as the present FTSE 100 average is 3.1%.

However, the projections are that it will increase the dividend to 25p this year, 34.7p next year, and 38.7p in 2027.

Those would give respective dividend yields on the current share price of 4%, 5.6%, and 6.3%.

My investment view

I bought the stock for its strong growth prospects, which drive any firm’s share price and dividends higher over time.

This was years ago when the bank was still busy extricating itself from the 2007/08 hole in which it had found itself. 

It looks to me like it has firmly done so now and looks set for strong growth ahead. This should power its share price and dividends higher, as forecast.

Consequently, I will be adding to my holding in the bank at the earliest opportunity.

The post Why this FTSE banking gem may hold a lot more value than we think appeared first on The Motley Fool UK.

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HSBC Holdings is an advertising partner of Motley Fool Money. Simon Watkins has positions in HSBC Holdings and NatWest Group 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.

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