NatWest (LSE: NWG) may not be recommended by many as one of the prime FTSE stocks to buy for both dividend and share price gains. But as Super Hans in iconic TV series Peep Show put it: “People like Coldplay and voted for the Nazis; you can’t trust people.”
Actually, despite strong profits and aggressive buybacks, the shares continue to trade at a discount to their underlying earnings power. And the bank has a whopping forecast dividend yield of 7.1%.
That combination of income strength and mispricing makes NatWest a compelling candidate for long‑term investors, in my view.
So, how much could be made here?
Double my money?
Discounted cash flow analysis is the best way I have found to work out where any stocks should be priced. It achieves this using forecast cash flows of the underlying business and then discounting them back to today.
Various inputs into the formula vary from analyst to analyst. But my calculations (including a discount rate of 8.3%) show NatWest is a stunning 51% undervalued at its current £6.27 price.
Therefore, the ‘fair value’ of the stock could be around £12.80 — more than double where it trades now.
Crucial for long-term investors to note here is that share prices typically gravitate towards their fair value in the long run. So this price-value gap suggests a potentially terrific buying opportunity to consider today if these calculations prove accurate.
Dividend bonanza?
Analysts expect NatWest’s dividend yield to rise to 5.8% this year, 6.5% next year and 7.1% in 2028, though payouts can fall as well as rise. By comparison, the FTSE 100’s present average is only 3.1%.
So, a £20,000 holding in the bank (the same as mine) would make £20,595 after 10 years and £147,244 after 30 years. This is based on the 7.1% forecast as an average and on the dividends being reinvested back into the stock (‘dividend compounding’).
Including the original £20,000 investment, the holding’s total value would be £167,244 by then.
And this would deliver an annual income of £11,874!
How’s the core business look?
A risk here is increasing competition that may squeeze NatWest’s margins. Another is any surge in the cost of living that may worsen its loan book.
However, analysts forecast that its earnings will grow by a solid annual average of 4.2% a year over the medium term at minimum. And it is growth here that supports both share price and dividend gains over the long run.
Indeed, its latest (annual 2025) results suggest they may grow a lot more than that, in my view. Operating profit before tax soared 24.2% year on year to £7.7bn, while income jumped 12.3% to £16.4bn.
My investment view
Taken together, the rising earnings, hefty dividends, and deep valuation gap paint a far more attractive picture than many in the markets may realise.
Over time, as earnings grow, the price-to-valuation gap should close. And in the meantime, investors should continue to be paid handsomely in dividends to wait.
I will certainly be adding to my holding in the stock soon. And I believe the shares are well worth considering — even for investors as sceptical as Super Hans.
