NatWest: High Income in a Volatile Market

After a strong run through 2025, NatWest (NWG) has spent the past few months consolidating as sentiment towards UK financials has cooled. However, beneath the surface, the bank continues to generate substantial profits, grow shareholder returns and trade on a valuation that still looks surprisingly modest for the quality of earnings now being delivered. For us, this increasingly looks like one of the more attractive income plays in the FTSE 100.

A Simpler Bank Generating Serious Cash

The scale of the recovery has been impressive. Reported earnings per share increased from 52.1p in 2024 to 67.4p in 2025, while total dividends climbed from 21.5p to 32.5p over the same period. Forecasts suggest that progression is set to continue, with consensus expectations pointing towards dividends of 36p in 2026 and more than 40p in 2027.

At current prices, the shares offer a forecast dividend yield of around 6.5%. Crucially, this does not look like a stretched yield propped up by weak fundamentals. Dividend cover remains healthy at just over 2x earnings, while the bank continues to generate substantial excess capital.

Alongside the dividend, NatWest has also been aggressively buying back shares. That matters because it steadily reduces the share count, helping earnings per share and future dividend capacity compound over time. In simple terms, management is increasingly returning surplus capital directly back to shareholders rather than allowing it to sit idle on the balance sheet.

Profitability Continues to Improve

One of the biggest misconceptions around UK banks is that profitability is purely a short-term function of interest rates. While higher rates have clearly supported margins across the sector, NatWest’s recovery has been driven by far more than that alone.

What makes the setup particularly interesting is that the valuation still feels anchored to an older perception of NatWest rather than the business it has become today. The market still tends to view UK banks with a degree of scepticism, even as balance sheets, capital levels and shareholder returns have improved materially across the sector.

That disconnect is where the opportunity may sit. We are looking at a business generating strong profitability, returning large amounts of capital to shareholders and still trading on less than 8x forward earnings.

Valuation Still Looks Undemanding

Despite the recovery in profitability, NatWest still trades close to book value and on a forward PE ratio of around 7.7x. That remains relatively modest for a business now generating double-digit returns on equity and rapidly growing shareholder distributions.

This is where the investment case becomes compelling from an income perspective. We are not relying on aggressive multiple expansion or a speculative growth narrative. Instead, the attraction comes from being paid a sizeable and growing income stream while holding a business that still appears conservatively valued.

Importantly, the dividend profile also looks increasingly dependable. The next dividend payment is due in early May, with a further interim dividend expected later in the year. Combined with ongoing buybacks, NatWest continues to stand out as one of the FTSE 100’s strongest total shareholder return stories.

Of course, UK banks will always remain sensitive to the broader economic backdrop and sentiment can shift quickly. However, the current valuation already appears to reflect a fair amount of caution, despite the substantial improvement in profitability and capital returns over recent years.

Technical Analysis: Consolidation Rather Than Breakdown

From a technical perspective, the shares have spent the past few months consolidating following a strong rally during 2025. After peaking earlier this year, the shares have pulled back through a series of lower swing highs, leaving the stock around 20% below its trend peak.

Five Key Takeaways

1. High income: NatWest offers a forecast dividend yield of around 6.5%.

2. Growing payouts: dividends and buybacks continue to accelerate shareholder returns.

3. Profit recovery: earnings and profitability have improved sharply in recent years.

4. Modest valuation: the shares still trade on less than 8x forward earnings.

5. Trend support: the longer-term recovery structure remains broadly intact.