Picture supply: NatWest Group plc
On 7 August, the NatWest Group (LSE:NWG) share value went ex-dividend. This implies these holding the financial institution’s inventory earlier than this date are entitled to obtain the interim dividend of 9.5p a share, which was paid right this moment (12 September). Add this to the ultimate payout for 2024 of 15.5p and the inventory’s yielding a powerful 4.8%. This places it within the prime fifth of FTSE 100 dividend shares.
As an added bonus, the inventory’s now altering fingers for two.3% extra than simply earlier than it went ex-dividend. It’s a win-win for shareholders.
Extra to come back
Nonetheless, analysts are predicting issues will get even higher for earnings buyers. Over the subsequent three years, they’re anticipating dividends of 29p (2025), 32.7p (2026) and 36.5p (2027). In the event that they’re proper, this pushes the ahead (2027) yield as much as a powerful 7%.
They’re additionally predicting share buybacks of round £1.6bn-£1.7bn a yr. Though — to be trustworthy — if I used to be shareholder, I’d slightly have the money in my hand. Nonetheless, for its above-average payout, earnings buyers might take into account the shares.
However there are by no means any ensures in terms of dividends, particularly within the banking sector the place earnings will be unstable.
A doubled-edged sword
Though larger rates of interest are, usually talking, doubtless to enhance NatWest’s internet curiosity margin, in addition they create one other potential downside.
Greater borrowing prices enhance the danger of mortgage defaults and losses to the financial institution. And with its publicity to the home economic system – on the finish of 2024, 90% of its loans have been to UK people and companies – it might be significantly susceptible to an financial downturn right here.
The potential affect of this may be seen by evaluating the impairment costs in its 2020 and 2024 accounts. Within the first yr of the pandemic, the financial institution elevated its provision for unhealthy loans by £3.2bn. Final yr, it booked a price of £359m. Okay, I’m not predicting something as unhealthy as 5 years in the past, however any slowdown within the economic system is prone to have an effect on the financial institution’s earnings.
Additionally, its revenue may very well be additional broken by the imposition of a windfall tax — or different levy — because it appears to be like as if the chancellor wants to seek out further sources of income to stability the nation’s books. We gained’t know till November whether or not Rachel Reeves decides to comply with the recommendation of numerous distinguished think-tanks and strain teams. But it surely stays a danger.
Not low cost
On the subject of valuation, NatWest has the second-highest price-to-earnings ratio of any FTSE 100 financial institution. Its price-to-book ratio is the joint highest. It is a concern to me — particularly given its reliance on the UK – which implies I’m not excited by taking a stake in the meanwhile.
InventoryWorth-to-earnings ratioWorth-to-book ratioLloyds Banking Group12.31.0NatWest Group8.51.1Barclays8.40.7Customary Chartered7.00.6HSBC6.80.9Common8.60.9Supply: London Inventory Alternate Group at 11 September
Though I just like the financial institution’s beneficiant dividend, I worry the current share value rally – it’s up 58% since September 2024 and it’s risen 375% over the previous 5 years – means it’s not the cut price it as soon as was.
Personally, I feel there are higher alternatives elsewhere.
