We recently compiled a list of the U.K. Dividend Champions List: 2024 Rankings by Yield. In this article, we are going to take a look at where NatWest Group plc (NYSE:NWG) stands against the other U.K. dividend champions.
In recent years, investors have shown a preference for global stocks, particularly high-growth options like US technology companies, over UK equities. Over the past decade, the British index has achieved a 6% annual total return compared to 13% for the US broader market. Analysts suggest that this underperformance is partly due to weak earnings, domestic political instability, and the absence of a significant technology sector in the UK market. However, a notable factor is the sharp decline in valuations as investors have steered away from UK stocks. Goldman Sachs remarked that the challenge is not a lack of interest from foreign investors, who currently hold about two-thirds of the UK market capitalization, but rather the limited participation of domestic investors in UK equities.
That said, investing in UK stocks can still be a worthwhile choice. While the UK market lacks significant technology companies, its equities in sectors like finance, energy, and mining provide diversification opportunities that complement the tech-heavy and highly valued US markets. In addition, the UK’s index faces less risk from tariffs and trade restrictions. Goldman Sachs Research highlighted that UK equities could gain from various government measures, such as pension reforms aimed at boosting domestic investment in UK stocks and policies supporting homebuilding initiatives.
Lindsay Matcham, involved in futures sales trading at Goldman Sachs Global Banking & Markets, suggested that UK equities could appeal to investors seeking diversification. She noted that these stocks offer attractive valuations, strong dividend yields, and reduced concentration risk.
Russ Mould, investment director at AJ Bell, presented a rather interesting take on the UK market’s limited exposure to technology stocks. He pointed out that this reduced exposure has made the UK stock market less volatile compared to the US, where technology stocks are a key driver of market fluctuations. Mould observed that, despite its criticisms, the UK market experienced a relatively stable summer compared to the US, attributing this to differences in valuation and the relative expectations of the two markets.
The lower volatility in the UK market presents compelling investment opportunities, particularly given its attractive dividend yields. The FTSE 100 offers a yield of 3.68%, while the FTSE 250, representing medium-sized UK firms, provides slightly lower but still appealing income prospects. This setup allows investors to explore higher-growth sectors, such as smaller companies while benefiting from rising dividends. According to BlackRock, UK dividends are currently growing at a rate of 2-3%, aligning with long-term inflation. Stocks that consistently grow their dividends often have stable cash flows, enabling them to increase payouts over time.
Janus Henderson’s 2023 annual dividend report highlighted this upward trend, revealing that UK dividends reached approximately $86 billion in 2023, a significant rise from the $63.1 billion distributed in 2020. Given this, we will take a look at some of the best FTSE dividend stocks.
Our Methodology:
For this list, we reviewed the UK CCC Dividend list, which highlights UK companies with the longest histories of dividend growth. This list is based on the structure of David Fish’s US Dividend Champions spreadsheet and serves as a useful tool to help identify and screen dividend growth stocks in the UK. From this list, we chose 10 stocks with the highest dividend yields as of December 29 and arranged them in order from lowest to highest yield. We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 900 as of Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A person using a laptop to access a bank’s online banking system.
NatWest Group plc (NYSE:NWG)
Dividend Yield as of December 29: 4.37%
NatWest Group plc (NYSE:NWG) is a London-based retail and commercial bank that offers mortgages, loans, credit cards, and related services. In the third quarter of 2024, the company reported an attributable profit of £1.17 billion and a return on tangible equity (RoTE) of 18.3%. Customer deposits, excluding central items, grew by £2.2 billion, driven by increased savings across all three business sectors. The company expects to maintain a RoTE above 15% for 2024 and projects income, excluding notable items, to reach around £14.4 billion. In addition, total income, excluding notable items, increased by £182 million (5.1%) compared to Q2 2024, primarily due to growth in lending, deposits, and margin improvement.
L1 Capital also highlighted this in its Q3 2024 investor letter. Here is what the firm has to say:
“NatWest Group plc (NYSE:NWG): NatWest is the largest commercial lender in the U.K. (20% share) and the second largest U.K. retail bank with ~13% of all mortgages. We see NatWest as best positioned in the U.K. Banking sector to benefit from improving margin trends, with topline growth supported by a rebound in U.K. housing and economic activity. Moreover, with significant buybacks owing to a strong capital position, NatWest should see ~8% EPS growth p.a. over the next three years vs. ~2% expected growth for CBA. Although CBA enjoys a more dominant market position in Australia vs. NatWest in the U.K., it appears overvalued in our view as it trades on ~24x FY25 P/E (historical highs) compared to only ~7x for NatWest.
NatWest (Long +10%) shares rallied on strong quarterly results including earnings ~28% ahead of consensus expectations and upgraded guidance driven by higher-than-expected revenues with net interest margin expanding 5bps. NatWest is the U.K.’s second largest retail bank with ~13% mortgage share and the U.K.’s largest commercial lender with ~20% share. In our view, NatWest leads the U.K. Banking sector with improving underlying operating trends, a superior mortgage margin trajectory and increasing interest rate hedge income. Importantly, management expects ongoing net interest margin expansion despite the impact of BoE rate cuts. We believe the company remains significantly undervalued, trading on an FY25 P/E multiple of only ~7x and a price to tangible book value ratio (P/TBV) of only ~1x. This is despite generating a 15% return on tangible equity and ~8% p.a. earnings growth over the next three years based on consensus expectations. We find these metrics and attributes very compelling, especially when compared to Australian banks.”
NatWest Group plc (NYSE:NWG) is delivering solid returns in 2024, surging by nearly 83% in the past 12 months. A significant portion of the company’s success in the past year is due to the unusually high interest rates, which allowed the bank to achieve exceptionally strong returns on its loans. In 2024, the bank consistently kept its net interest margin—the difference between the interest it paid and earned—above 2%.
NatWest Group plc (NYSE:NWG) is a solid dividend payer as the company expects to pay ordinary dividends amounting to approximately 40% of its attributable profit in FY24. Currently, it pays a semi-annual dividend of $0.1543 per share for a dividend yield of 4.37%, as of December 29.
As of the close of Q3 2024, 15 hedge funds tracked by Insider Monkey reported having stakes in NatWest Group plc (NYSE:NWG), up from 11 in the previous quarter. These stakes are collectively valued at over $33.8 million.
Overall NWG ranks 3rd on our list of the U.K. dividend champions for 2024. While we acknowledge the potential of NWG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NWG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
