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Like billionaire investor Warren Buffett, I like to go purchasing for shares which can be low cost. And proper now, a case could be made that NatWest Group (LSE:NWG) is without doubt one of the FTSE 100‘s best value shares.
At least, that’s in line with earnings and dividend forecasts for the blue-chip financial institution.
At 313.5p per share, NatWest shares commerce on a ahead price-to-earnings (P/E) ratio of seven.4 occasions. In addition they carry a dividend yield of 5.3%, primarily based on the Metropolis’s predictions for 2024 dividends.
Let’s drill down into these numbers, and think about whether or not the financial institution is (or isn’t) the discount that it seems at first look.
Engaging worth
To evaluate the corporate’s worth, I’ve in contrast it to the broader FTSE 100 index, together with different main banking shares on the London inventory market.
On the primary measure NatWest’s share worth does properly. Its potential P/E ratio of seven.4 occasions is properly under the Footsie common of round 11 occasions.
In the meantime, its 5%+ dividend yield for this yr surges above the three.5% index common.
NatWest’s worth for cash towards the broader banking business is extra combined although.
Its P/E ratio for 2024 is beneath the sector common of 8.5 occasions. This group consists of Lloyds Banking Group, Barclays, HSBC Holdings, Normal Chartered and Banco Santander.
Nonetheless, its dividend yield of 5.3% undershoots the business common of 5.9%.
To purchase, or to not purchase?
All issues thought of, NatWest shares appear to supply strong worth for cash. So you could count on me to interrupt out my chequebook and cargo up on the financial institution.
This isn’t one thing I plan to do any time quickly. As a long-term investor, I wouldn’t contact the FTSE financial institution with a bargepole, in reality. It’s my opinion that NatWest’s low valuation displays its poor progress prospects and excessive danger profile.
The corporate’s share worth stays 17% decrease than it was 10 years in the past. The financial institution faces vital challenges to get wherever shut to those earlier ranges.
Too dangerous
Britain’s banks have risen in worth on hopes of rate of interest cuts ranging from the summer time. A fall in charges may stimulate revenues and cut back the probabilities of thumping mortgage impairments.
Nonetheless, rate of interest reductions are double-edged swords as additionally they cut back margins.
NatWest’s first-quarter web curiosity margins (NIMs) are already underneath vital stress, reflecting the top of the Financial institution of England’s price mountaineering cycle. These dropped 0.2% from a yr earlier, to 2.05%, when mounting competitors put added stress on the financial institution.
UK-focused banks like NatWest and Lloyds additionally face a troublesome time because the British financial system splutters. The OECD thinks progress will likely be simply 0.4% and 1% in 2024 and 2025, respectively, with GDP growth tipped to be the weakest throughout the G7 subsequent yr.
The concern is that this backdrop of poor progress could persist past simply the brief time period. The UK faces huge structural issues like labour and abilities shortages, excessive public debt, and rising commerce frictions that may take years to appease. And at this time there’s no clear path to beat these obstacles.
As I say, NatWest shares are low cost. However there are many different low-cost FTSE 100 shares I’d reasonably personal proper now.