I hold both NatWest (LSE: NWG) and Lloyds (LSE: LLOY) shares in my core FTSE 100 investment portfolio.
I bought the stocks for three key reasons, all of which still hold good, in my view. However, if I had to choose which one to invest more in currently it would be NatWest.
The onset of a genuine major financial crisis remains a risk for both stocks, of course. Another is that interest rates peak and fall sooner than expected.
Unwarranted drop in share prices?
NatWest’s and Lloyds’ share prices are down 32% and 17% respectively from their highs this year.
Most of these losses were attributable to market jitters surrounding the mini-banking crisis in February/March. This resulted from the failure of Silicon Valley Bank and then Credit Suisse.
Even at the time, this share price reaction looked unwarranted to me. NatWest and Lloyds are seen by the UK government as too important to be allowed to fail, as the 2007 Great Financial Crisis proved. For added assurance, the state still has a 38.6% stake in NatWest.
Undervalued compared to their peers
Both stocks look undervalued compared to their UK and European peers.
In the UK banking sector, NatWest trades at a price-to-earnings (P/E) ratio of 4.1, and Lloyds at 4.5. Barclays is at 3.9, HSBC Holdings at 5.3, and Standard Chartered at 11.8 – giving a peer group average of 6.3.
In Europe, the peer group average is 7.4. In both comparisons, NatWest is more undervalued than Lloyds.
In terms of the fair value for each bank’s shares, I applied the discounted cash flow (DCF) model. I used several analysts’ valuations as well as my own.
The core assessments for NatWest are between 63% and 86% undervalued. For Lloyds they are 28% to 64% undervalued.
Taking the lowest of these for NatWest gives a fair value per share of £5.78, compared to the current £2.14. Doing the same for Lloyds, gives a fair share price of 62.5p, compared to the current 45p.
This highlights to me that both offer good value, but NatWest offers much more than Lloyds.
Good passive income payers
In 2022, NatWest paid a regular dividend of 13.5p per share. Based on the current share price, this gives a yield of 6.3%.
However, it also paid a special dividend of 16.8p. This gives a whopping yield of 14%.
The bank has not indicated whether it will pay another special dividend this year. But it did increase its interim payment this year by 57% — from 3.5p to 5.5p.
If this was applied to this year’s final dividend, then the total would be 21.2p. Based on the current share price, this would give a stunning 9.9% yield, with no special dividend included.
Lloyds paid out 2.4p per share in dividends in 2022. With the share price at 45p now, this yields 4.4%.
Its strong H1 results allowed it to increase its interim ordinary dividend by 15% — to 0.92p. If this increase was applied to the final dividend, the current yield would be 6.1%.
This is the second big reason in my view to increase my holding in NatWest rather than in Lloyds.
The post Better FTSE bank buy for 2024: NatWest or Lloyds? appeared first on The Motley Fool UK.
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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Simon Watkins has positions in Lloyds Banking Group Plc and NatWest Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023
