Image source: NatWest Group plc
Imagine being able to buy coins for less than 64p each at the start of the year – and you're already paid to own them! That's just what happened to the other FTSE 100 to share. It's up 57% so far this year – and has an annual dividend yield of 5.1% to boot!
Now, stocks are different than coins. This stock has increased in value this year. But that doesn't mean it will continue to do so. Don't fall. Even so, it added to the 73% return shareholders have enjoyed over the past five years.
A high street bank with a lot to like
The company in question is familiar to most of us: NatWest (LSE: NWG).
NatWest owns an anonymous bank and operates under other brands, such as Royal Bank of Scotland and Ulster Bank.
I think there's a lot to like. It has strong brand recognition, a large customer base, strong profitability and should benefit from strong long-term demand for financial services.
Why are stocks so valued?
Given that strength (which in my mind was just as obvious in January as it is now), why has the stock gone up and why is it still trading at a seemingly low multiple of 7.3 times earnings?
NatWest is not the only bank with a P/E ratio that looks low at the moment. Lloyds you sell eight times more Barclays at 9.
I think these rates reflect the perceived risks of an uncertain economy. If that leads to a soft housing market and loan defaults, bank profits may decline. NatWest's first half profit from continuing operations was 12% lower than the same period last year.
But here is a point that is not clear. If P/E ratios are still so low because banks continue to be seen as risky, why has NatWest more than halved in value so far this year? Are investors ignoring the risks?
One explanation is that since the government has continued to sell its stake (the remainder of the bailout during the financial crisis), the City has paid more attention to business fundamentals and valuations. It seemed cheap before and was giving out a lot of money
Even after this year's share price gains – greater than the 22% and 47% seen at Lloyds and Barclays, respectively – its P/E ratio remains the lowest of the two.
Can things keep going up?
However, as those other bank prices suggest, investors have warmed to the sector this year.
Fears of a sharp economic downturn have not materialized, so the risk discount on stocks has narrowed and their prices have risen. They can go higher from here.
Nevertheless, I am still nervous about the health of the global economy. US economic indicators suggest that the world's largest economy may be struggling. I fear what that could ultimately mean for bank stocks on both sides of the pond.
At the moment, I have no plans to buy NatWest – or any of its FTSE 100 banking peers.
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