Introduction and Dividend and Buyback Policy
NatWest is a British banking and financial services company that has been in operation for over 300 years. The company was founded in 1968 as the National Westminster Bank, following the merger of the National Provincial Bank and the Westminster Bank. Today, NatWest is one of the largest banks in the United Kingdom, with a strong presence in both the retail and commercial banking sectors. NatWest has a rich history that dates back to the 17th century when its predecessor banks were first established. The National Provincial Bank was founded in 1833, while the Westminster Bank was established in 1836. The two banks merged in 1968 to form the National Westminster Bank, which was later rebranded as NatWest in 1999. NatWest is a subsidiary of the Royal Bank of Scotland Group, one of the largest banking groups in Europe. The company offers a wide range of financial services, including personal and business banking, wealth management, and insurance. As of December 2021, NatWest had over 19 million customers and a workforce of approximately 59,000 employees. In 2020, the company generated total operating income of £10.8 billion and a net profit of £2.7 billion (NatWest Group, 2020).
Dividend Policy
NatWest has a long history of paying dividends to its shareholders. In 2020, the company announced a final dividend of 3p per share, bringing the total dividend for the year to 3.5p per share (NatWest Group, 2020). The company has a stated policy of paying out 40-50% of its earnings as dividends, subject to economic conditions and regulatory requirements (NatWest Group, n.d.).
Share Buyback Programme
NatWest has also implemented a share buyback programme as a means of returning value to its shareholders. In 2020, the company announced a share buyback programme of up to £750 million, which was completed in February 2021 (NatWest Group, 2020). The company has stated that it may consider further share buybacks in the future, subject to market conditions and other factors (NatWest Group, n.d.).
Evaluation of Share Buybacks
NatWest is a UK-based bank that has engaged in share buybacks in the past. This report investigates the company’s buyback activity before and after the onset of the COVID-19 pandemic, and evaluates the impact of these buybacks on the company’s financial performance and investor sentiment. The report also considers regulatory and ethical considerations related to the company’s buybacks.
NatWest has engaged in share buybacks in the past. According to the company’s 2019 Annual Report, NatWest repurchased £1.1 billion worth of shares in 2019 (NatWest Group plc, 2020). The company’s rationale for conducting buybacks in the past has been to “return excess capital to shareholders” (NatWest Group plc, 2019). According to a report by Reuters, NatWest suspended its share buyback program in March 2020 in response to the COVID-19 pandemic. The company’s CEO, Alison Rose, stated that the decision was made in order to prioritize support for our customers, colleagues, and communities (NatWest Group, 2020). The company resumed its share buyback program in August 2021, repurchasing £750 million worth of shares (NatWest Group, 2021). The impact of NatWest’s share buybacks on the company’s financial performance is mixed.
In 2019, the company’s earnings per share increased as a result of the share buybacks (NatWest Group plc, 2020). However, the suspension of the buyback program in 2020 was likely a factor in the company’s decline in profitability that year. The resumption of the buyback program in 2021 may have a positive effect on the company’s financial performance going forward. Investor sentiment regarding NatWest’s share buybacks is also mixed. In 2019, the company’s share price increased following the announcement of the share buyback program (NatWest Group, 2020). However, the suspension of the program in 2020 may have contributed to a decline in investor confidence, as evidenced by a drop in the company’s share price that year. The resumption of the buyback program in 2021 may have a positive effect on investor sentiment. NatWest’s share buybacks have complied with relevant regulations.
The company has stated that it complies with all applicable laws, rules, and regulations governing share repurchases (NatWest Group plc, 2019). However, there may be ethical considerations related to the company’s decision to prioritize share buybacks over other uses of capital during a time of economic uncertainty and hardship. Critical Evaluation of Dividend Policy Companies can choose from several types of dividend policies, including stable, constant, and residual. Stable dividend policies involve paying a consistent dividend over time, while constant dividend policies involve paying a fixed dividend per share, regardless of fluctuations in earnings. Residual dividend policies involve paying dividends based on the amount of residual earnings left after a company has invested in new projects or paid off debt (Graham & Dodd, 1934).
Dividend payments are significant to shareholders as they can provide a steady source of income, especially for those who rely on dividend income for their living or retirement purposes. Additionally, dividend payments can serve as a signal of a company’s financial stability and strength, which can attract investors and increase share value (Allen & Michaely, 2003).
The signaling hypothesis suggests that dividend payments can provide information to investors about a company’s financial performance and prospects. In other words, companies that pay dividends may be signaling their confidence in their ability to generate future earnings (Baker, Farre-Mensa & Yafeh, 2011). The clientele effect suggests that different types of investors prefer different dividend policies based on their personal financial needs and preferences. For example, investors who rely on dividends for income may prefer companies that pay regular dividends, while those who prioritize capital gains may prefer companies that reinvest their earnings (Miller & Modigliani, 1961). Finally, the bird-in-the-hand theory suggests that investors prefer dividends over potential capital gains, as dividends provide a guaranteed income in the present, while capital gains are uncertain (Lintner, 1956). The irrelevance theory suggests that dividend policy has no impact on a company’s value or share price, as investors are indifferent to whether they receive dividends or capital gains (Miller & Modigliani, 1961).
The tax disadvantage argument suggests that dividend payments are subject to higher taxes compared to capital gains, which may discourage companies from paying dividends (Graham & Dodd, 1934). Additionally, the agency costs argument suggests that dividend payments may create conflicts of interest between management and shareholders, as managers may prioritize their own interests over those of shareholders (Jensen & Meckling, 1976). Numerous studies have examined the relationship between dividend policy and share value, with mixed results. Some studies have found a positive correlation between dividend payments and share price, while others have found no significant relationship (Allen & Michaely, 2003).
Other studies have examined the impact of dividend policy on various financial metrics, such as earnings per share and return on equity, with mixed results as well (Baker, Farre-Mensa & Yafeh, 2011). Despite the mixed evidence, dividend payments can provide important signals to investors and serve as a source of income for shareholders. Thus, companies should carefully consider the factors influencing dividend policy decisions and communicate their decisions clearly to shareholders.
A number of factors can influence a company’s decision regarding dividend payments, including the company’s financial performance, growth prospects, tax considerations, and the preferences of shareholders (Allen & Michaely, 2003). Additionally, companies may consider the impact of dividend payments on their ability to invest in new projects or acquisitions (Baker, Farre-Mensa & Yafeh, 2011).
