NatWest (LSE:NWG) is a dividend stock I wish I’d never sold, and I’d buy it back right away if my portfolio wasn’t already heavily weighted towards UK banking stocks.

To put the record straight, I didn’t want to sell my NatWest shares earlier this year. But I was buying a house, and something had to give.

The stock has almost doubled in value since I parted with my shares, and the data suggests it could go much higher.

And on Friday (26 July), the bank’s results pushed the stock almost 10% higher. It had been vastly undervalued by the market.

Beating expectations

It’s been a mixed season for results, and with market sentiment dipping, investors have been keeping a watch for any weakness.

But there was nothing weak in NatWest’s results.

The group reported strong half-year results for 2024, significantly exceeding market expectations.

Second-quarter operating profit rose by 27.7%, hitting £1.7bn, driven by a five basis point improvement in net interest margin to 2.1%.

And this pushed the first-half operating profit up to £3bn. That was down 15% on last year’s exceptional conditions.

The company also posted better-than-expected bad loan provisions, mirroring Lloyds earlier in the week, and suggesting an element of strength within the UK economy.

Additionally, NatWest has announced a deal for the acquisition of a £2.5bn portfolio of prime UK residential mortgages from Metro Bank.

It will add around 10,000 customer accounts, further strengthening its mortgage offerings and market presence.

Good signs everywhere

There were good signals throughout the results, including a Return on Tangible Equity (RoTE) of 16.4% for H1 — which is above its peers — and an improving CET1 ratio.

The banks also upgraded its RoTE outlook for the year to above 14% from around 12%. Its second-quarter ratio was 18.5%. This smashed the consensus estimate of 13.4%.

NatWest now expects to report £14bn of total income excluding notable items for the year. This is up from its previously guided £13bn.

Still an attractive valuation

NatWest shares have risen so quickly that it’s fast approaching its average share price target. This target figure represents what analysts believe to be fair value for the stock.

Nonetheless, the stock’s valuation remains attractive. It’s trading at 8.3 times projected earnings for the year, 7.7 times projected earnings for 2025, and 6.8 times expected earnings for 2026. Coupled with a 5% dividend yield, it’s a very handsome proposition.

Of course, everything is relative. UK banks have traded at discounts to their American peers for some time, and it’s not clear how much this valuation gap will close over the next few years — if at all.

There are still concerns for the UK banking sector, although things are broadly looking up. The economy is set to improve, but that doesn’t mean there won’t be challenges.

For example, the longer interest rates stay this high, the more pressure it will put on NatWest clients. This could make bad debt a big issue once again.

The bottom line

NatWest stock has surged over the past year. And this will undoubtedly put some investors off.

But I’d consider buying NatWest shares for the long run if I didn’t already have considerable exposure to the sector in the form of Barclays and Lloyds.