We recently published a list of 10 Safest Dividend Stocks in the UK. In this article, we are going to take a look at where NatWest Group plc (NYSE:NWG) stands against other safest dividend stocks in the UK.
In recent years, investors have increasingly shifted away from UK equities, favoring global stocks, particularly high-growth sectors like US technology. The UK stock market is shrinking at its fastest pace in over a decade, largely due to a wave of takeovers involving London-listed companies. Bloomberg data showed that around 45 firms have been delisted from the London market in 2024 through mergers and acquisitions, reflecting a 10% rise from last year’s total. This marks the highest level of delistings since 2010. At the same time, the value of deals involving UK companies has climbed 81% this year, surpassing $160 billion.
Over the last ten years, the British index has delivered an annual total return of 6%, significantly lagging behind the 13% return of the broader US market. Analysts attribute this weaker performance to sluggish earnings growth, political uncertainty within the UK, and the lack of a dominant technology sector. However, a key factor has been the sharp drop in valuations as investors have increasingly moved away from UK stocks. According to Goldman Sachs, the issue is not a lack of foreign investor interest—who currently account for roughly two-thirds of the UK market capitalization—but rather the low engagement of domestic investors in UK equities.
Also read: 10 Best Annual Dividend Stocks To Buy Now
That said, several factors seem to be contributing to a shift in investor sentiment. In November 2024, UK equity funds saw inflows after more than three years of continuous monthly withdrawals and a large sell-off leading up to the Budget. According to data from Calastone, retail investors invested a net £317 million into UK-focused stock funds that month. This marks a significant change, halting a streak of 41 months of net outflows, during which over £25 billion had been pulled from these funds since May 2021.
Analysts also believe that the UK stock market may be on the verge of recovery, although the exact timing and pace of this shift are unclear. In this context, dividend stocks are crucial. Focusing on stocks with growing dividends can offer stability and consistency across different market conditions. These stocks also provide long-term growth potential, compounding returns as share prices recover. The UK market offers some of the highest dividend yields among major markets, with the “Footsie” yielding 3.46%, and the FTSE 250 offering slightly lower but still attractive yields. This setup enables investors to focus on high-growth areas, like smaller companies, while enjoying the benefit of increasing dividends. According to BlackRock, UK market dividends are currently growing at a rate of 2-3%, roughly in line with long-term inflation. Companies with growing dividends typically have strong cash flows, allowing them to increase payouts over time.
Janus Henderson’s 2023 annual dividend report highlighted a significant increase in dividend growth, revealing that the UK paid out roughly $86 billion in dividends last year, up from $63.1 billion in 2020. Looking ahead, the UK’s stock market index is projected to distribute about £83.6 billion in dividends in 2025, marking a 6.5% rise from the £78.5 billion expected in 2024. Given this, we will take a look at some of the best FTSE dividend stocks.
Our Methodology:
For this article, we scanned Insider Monkey’s database of 900 hedge funds as of Q3 2024 to find FTSE stocks that are also traded on US exchanges. Our focus was on companies that have strong dividend policies and consistently distribute dividends to their shareholders. The stocks are ranked in ascending order of hedge funds’ sentiment toward them.
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)
Number of Hedge Fund Holders: 15
NatWest Group plc (NYSE:NWG) ranks eighth on our list of the best FTSE dividend stocks to buy now. The retail and commercial banking company that offers mortgages, loans, credit cards, and related services. The stock is delivering strong returns, surging by over 112% in the past 12 months. A key factor in the company’s success over the past year has been the unusually high interest rates, which enabled the bank to generate exceptionally strong returns on its loans. Throughout 2024, the bank consistently maintained its net interest margin—the gap between the interest it paid and earned—above 2%.
In the third quarter of 2024, NatWest Group plc (NYSE:NWG) reported a profit of £1.17 billion and a return on tangible equity (RoTE) of 18.3%. Customer deposits, excluding central items, rose by £2.2 billion, driven by higher savings across all three business sectors. The company anticipates maintaining a RoTE above 15% for 2024 and expects income, excluding notable items, to total around £14.4 billion. In addition, total income, excluding notable items, grew by £182 million (5.1%) from Q2 2024, mainly due to increased lending, deposits, and improved margins.
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 a reliable dividend payer, with expectations to distribute ordinary dividends equaling around 40% of its attributable profit for FY24. At present, the company provides a semi-annual dividend of $0.1543 per share for a dividend yield of 3.96%, as of February 10.
Overall, NWG ranks 8th on our list of safest dividend stocks in the UK. While we acknowledge the potential for 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.