The UK government owns around 35% of the total NatWest (LSE:NWG) shares. Confusingly, it plans to get them out of the public sector and into private hands by selling them to the public.
This kind of thing doesn’t happen often – in fact, it hasn’t happened in my lifetime. So should UK investors be getting ready for a rare opportunity?
Full value
I find the government’s communications confusing. On the one hand, Jeremy Hunt insists the government would need to achieve “full value” in the event of any sale.
I’m not sure what exactly that means, but it sounds plausible. It’s arguably not in the national interest for the UK to be unloading an asset for less than it’s worth.
The trouble is, it sounds like a way of suggesting that buyers shouldn’t expect to get particularly good value. But that raises the question of why anyone should want to buy it, in that case.
It therefore seems likely that the government unwinding its stake would involve a discounted sale price. The next question, though, is whether anyone should want to buy the shares.
Value trap?
Personally, I’m wary of being drawn into buying a stock – any stock – just because it’s trading at a discount. Over the long term, I think what matters is the quality of the underlying business.
There are a few reasons for thinking NatWest doesn’t stack up that well in this regard. The company recently released its 2023 earnings results, which weren’t that inspiring.
The company’s net interest margin – the difference between the rate on its loans and its deposits – was just over 3%. Barclays, however, achieved a spread closer to 4%.
Margins contracted during the last three months of the year, though, from 2.94% to 2.86%. That’s common across the sector (Lloyds saw a decline from 3.08% to 2.98%) but it’s still significant.
A brighter future?
In fairness to NatWest, there are a couple of reasons why 2023 might not be representative of the company’s future prospects. For one thing, there’s a change of leadership.
The bank is going to look to put the issues of the last year – including scandal involving Nigel Farage – behind it. And it’s getting started with some significant shareholder returns.
In April, the company will pay an 11.5p dividend – roughly 4.8% of the current share price – to shareholders. And another £300m in share buybacks should provide another 1.5% return.
While this will come before any government sale, a 6.5% return in short order is an enticing prospect. The question, though, is what happens after that.
Long-term investing
Rising interest rates have made the last couple of years very good for banks. My biggest concern with NatWest is that it hasn’t fully taken advantage of that, as a result of various internal issues.
Even if the bank is in a better position than it was before, the environment looks less promising. And that might mean a real opportunity has been missed.
The stock is cheap. But if I bought it at a low price, I’d only be looking for an opportunity to sell it again and the UK government is demonstrating that this isn’t easy.
With that in mind, I’d rather focus on what I think are better opportunities. These include other UK bank shares as well as stocks in other sectors.
