This income stock looks a bargain as profits and dividends soar

NatWest (LSE: NWG) has long been a star income stock in my view. Its recently released 2022 results only bolster this view.

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With operating profits for the year of £5.1bn, up 34% in 2021, and attributable profit of £3.3bn, NatWest announced a final dividend of 10p per share. It also promised another share buyback programme of up to £800m in the first half of 2023. This would take total distribution deducted from capital in 2022 up to £5.1bn, or to 53 pence per share.

This £5.1bn comprises £1.3bn in dividends, a special half-year dividend of £1.75bn, the directed buyback of £1.2bn last March and the third buyback to come.

This income stock’s other key operating figures were similarly impressive. NatWest delivered an above-target return on tangible equity of 12.3% and a net interest margin of 2.85%, 55 basis points higher than in 2021. On the other side of the balance sheet, NatWest’s total operating expenses were £71m lower than in 2021.

So, why the sell-off?

As affected Barclays’ share price after its 2022 results announcement shortly before those from NatWest, consensus analyst opinion is that the operating environment for UK banks will become more difficult in 2023.

The view is that the UK’s mix of still-high inflation and the elevated interest rates designed to combat will result in higher default rates by banks’ customers on loans and mortgages.

This concern was echoed by NatWest’s chairman Howard Davies.

The outlook for this year remains challenging, with a decline in economic activity expected and a further tightening of real incomes which will inevitably affect spending and borrowing.”

Robust balance sheet and exciting plans

This said, NatWest’s chief executive officer Alison Rose highlighted the bank’s robust balance sheet, responsible lending and continued capital generation will enable it to deliver sustainable returns.

In 2022, the bank reduced expenses by 2.9%, in line with its target. This resulted in a drop in its cost-income ratio from 70% in 2021 to 55.5%. NatWest’s Common Equity Tier One (CET1) ratio at the of 2022 was 14.2%, also in line with its target.

Looking ahead, NatWest is building out its payments offerings for commercial customers, including payment provider Tyl, and a platform using the UK’s open banking infrastructure called Payit. It is also aiming to consolidate its position as the number one UK high-street bank for start-ups, in which it had a share in 2022 of 16.4%.

Commitment to high payout ratio

In summary, said Rose, NatWest plans to operate with a CET1 ratio of 13 to 14% over the medium term and to deliver a sustainable return on tangible equity of 14 to 16%.

The bank also intends to maintain its payout ratio of 40% in 2023, with the capacity to deploy any excess capital by making additional buybacks.

This combination of enduring appeal as a star income stock with solid fundamentals means that I am looking to buy the stock in the very near term. However, I will wait for a clearer picture of comparable stocks to emerge in the next few days with the results from HSBC.

The post This income stock looks a bargain as profits and dividends soar 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 no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and HSBC Holdings. 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.