Image source: Getty Images
NatWest (LSE: NWG) shares have been shooting the lights out. They’re up 50% over the last year and 390% across five years, with dividends on top.
The Barclays (LSE: BARC) share price is also going great guns, climbing 68% in the past 12 months and 290% over five years.
Investors who hold either stock (or both) will be thrilled. Those who don’t may be kicking themselves. As ever, the big issue is what happens next.
The obvious answer is that nobody knows. If they did, they’d be multi-trillionaires. All we can do is give it our best shot.
Valuations still look appealing
One way of peering ahead is to check traditional valuation methods. On the price-to-earnings ratio, both banks look decent value. NatWest sits at 10.02, while Barclays is at 10.68. A figure of 15 is seen as fair value, so both appear undervalued with scope for growth.
Bank investors also like to use the price-to-book (P/B) ratio, which compares a company’s market capitalisation to its underlying book value. A P/B around one is regarded as solid, while anything below two can still look worthwhile. NatWest is at 1.11. Barclays is at just 0.72. Both look decent value on this measure. Barclays is surprisingly cheap, given recent performance.
Analyst targets are upbeat
Another imperfect but useful guide is to look at 12-month broker forecasts. These aren’t always current but give a sense of where the market thinks the shares could head.
The 18 analysts covering NatWest produce a median target of 603.6p, which is 17.75% higher than today’s price. Forecasts range from 500p to 700p.
For Barclays, the 17 analysts covering the stock deliver a median target of 410.55p, a smaller rise of 7.57% from today. Again, there’s a wide range, from 290p to 500p.
These targets suggest slower growth ahead, which is only natural after such a strong run. Yet they still point to progress, especially for NatWest.
Returns boosted by dividends
Both banks also reward investors through dividends. NatWest is forecast to yield 5.79% in the next year. Add that to its growth forecast, and the total return climbs to 23.54%. That would turn £10,000 into £12,354, which is a very decent return. If it happens.
Barclays has a smaller forecast yield of 2.36%. It tends to favour share buybacks over dividends, which is a different way of rewarding shareholders. If that forecast is correct, its total return would reach 9.93%, turning £10,000 into £10,993.
Economic risks remain. Inflation is sticky, growth is sluggish and consumers are under pressure. Barclays also has big exposure to the US through its investment bank, and while Wall Street is strong, there are always fears of a recession. Interest rate cuts might support the economy, but would also narrow net interest margins, which squeezes banking profitability.
My approach
I think growth has to slow, but still believe both FTSE 100 banks are worth considering buying at today’s valuations. Personally, I favour NatWest, because I prefer dividend income to buybacks. None of us know what’s round the corner, so investors should spread risk and invest with a long-term view.
