Stock market

NatWest’s share price is on fire! Should I buy?

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gave Natwest Group (LSE: NWG) share price gains. Since November 2023, it has increased by 85%. And it shows no sign of stopping.

Do I think it’s still too cheap? You bet I do. NatWest is at the top of my 2024 stocks and shares ISA candidate list, and I want to tell you why.

Resurgent Bank

We have come a long way since the days of the banking crash. At the time, NatWest was known as Royal Bank of Scotland, and it was the biggest casualty of them all.

It wouldn’t be here today without a taxpayer bailout. And even now, the government still owns around 28 percent of the shares. But it is selling them, which will eventually return the bank to full free-market ownership. It should be good.

Before I get too excited about what I see as a cheap stock, there are risks ahead, which potential buyers need to be aware of.

2024 earnings are falling.

Bank revenues are falling in 2024, as higher interest rates continue to put pressure on borrowing. How the Bank of England rate cut, expected later in the year, will affect banks is still debatable. They should ease the mortgage market, but also reduce banks’ interest margins.

NatWest itself saw pre-tax profit fall 27% in the first quarter.

On top of that, global economists are predicting more pain in the long run, and UK growth forecasts look thin.

Still, at Q1 time, NatWest stuck to its outlook guidance. So we can see a 12% return on tangible equity (RoTE) rising above 13% by 2026. and 2024 revenues, excluding exceptional items, from £13bn to £13.5bn. I would be happy with that.

Great company, fair price?

So, is NatWest what top investor Warren Buffett can call a brilliant company at a reasonable price? Looking at today’s assessment, I think it just might.

Broker forecasts place NatWest shares at a price-to-earnings (P/E) ratio of just around 8.4. And with earnings expected to return to growth over the next two years, it could drop to less than seven by 2026.

On top of that, the 5.3% forward dividend yield for 2024 could reach 5.7% over the same period.

Yes, the financial outlook is still tight and the sector is risky. But isn’t this fear already factored into this low stock valuation? I think it is.

Cash return

On top of the dividend, NatWest announced a new share buyback in February with results for the 2023 financial year. It should reach £300m. And that means a total dividend of around 40p per share for the full year.

For shares priced at 326p (at the time of writing), I rate that as very good. And that’s even after prices have rocketed over the past few months.

So, should I buy NatWest shares for my ISA? I will make that decision when I have the money. But right now, it’s firmly among the favorites.

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