Is Barclays PLC A Promising Capital-Growth Investment?

Some firm’s growth is more sustainable than others. What about Barclays PLC (LON: BARC)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BarclaysWith last week’s interim results from Royal Bank of Scotland revealing a sharp rise in profits, all eyes turn to Barclays (LSE: BARC), due to release its own interims on 30 July.

There’s a good chance that we’ll see profits on the rise at Barclays, too. So does that make the firm a good candidate for a capital-growth vehicle? I don’t think so.

Is the valuation flagging a warning?

City analysts following Barclays seem to think that profits will increase, predicting a 39% lift this year followed by a 23% rise in 2015. At today’s share price of 218p, the forward P/E ratings come in at around 9.4 and 7.6 respectively. When you consider that with the forward dividend yield, running at just under 5% for 2015, Barclays looks good value on traditional valuation indicators.

Should you invest £1,000 in Barclays right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barclays made the list?

See the 6 stocks

The trouble is that traditional valuation indicators don’t work very well for cyclical shares such as Barclays. In fact, they tend to work in reverse, so a high yield and a low P/E rating could be warning investors to keep away.

Barclays’ share-price chart for the last four years reveals a downward trend, just as profits are rising. That situation works against a successful capital-growth investment and can even nullify shareholder gains from dividend income. But why is it happening? The answer to that question seems to be in the way that the stock market looks constantly forward. Cyclicals tend to see their profits rise and fall along with macro-economic cycles. So the stock market knows that rising profits will lead to a profit peak, which precedes another profit decline. So, to keep one step ahead, the market tends to de-rate P/E valuations as profits rise. There’s no doubt about it: timing an investment in cyclical companies is tricky mid-cycle.

Where’s the cash?

The last cyclical bottom hit the banks particularly hard and Barclays struggles to purge legacy issues from its system. The firm is fighting to de-leverage from a position of dizzyingly high financial gearing, and to de-risk its business for reputation and conduct, after a string of conduct-related scandals.

Reform like that takes buckets of cash and Barclays didn’t have enough, which caused it to host a £5.8 billion dilutive Rights Issue last year. You can see why the firm needed extra funds when you look at the cash record:

Year to December 2009 2010 2011 2012 2013
Cash at bank (£m) 81,483 97,630 106,894 86,191 45,687
Net cash from operations (£m) 41,844 18,686 29,079 (13,823) (25,174)
Net cash from investing (£m) 11,888 (5,627) (1,912) (7,097) (22,645)
Net increase/decrease in cash (£m) 49,831 17,060 18,273 (27,873) (41,711)

I don’t think you need look much further than that table to see what keeps Barclays on a low rating. A firm’s ability to generate and hang onto cash is its most fundamental measure of worth, and in recent years, Barclays looks like a basket case.

Before Barclays stands any chance of halting or reversing its share price decline, I think we must see a robust turnaround in its cash fortunes. Therefore, I’ll be looking for clues with this month’s interim statement, but reserving judgement on the firm’s financial progress until the full-year results are in at the beginning of next year.

What now?

One thing that I definitely won’t be doing is investing in Barclay’s right now. I’m looking for firms with bright growth prospects and as little cyclicality in their operations as possible.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Barclays right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barclays made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.

More on Investing Articles

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »

Investing Articles

Are Trump’s tariffs a once-in-a-lifetime chance for ISA investors to get rich?

The £20,000 Stocks and Shares ISA limit will reset on 6 April. Smart investors could use current market volatility to…

Read more »

Investing Articles

Here are the latest Persimmon share price and dividend forecasts

Our writer looks at the latest forecasts for the Persimmon share price and considers what level of dividend the stock…

Read more »

British Pennies on a Pound Note
Investing Articles

Up 900%, could penny share Kodal Minerals have further to run?

Over five years, this penny share has increased in value by a factor of 10. Could the latest news persuade…

Read more »

Investing Articles

3 world-class stocks to consider buying, while they’re ‘on sale’

Looking for stocks to buy? These three all have attractive long-term prospects and are currently trading 20% or more below…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Could BP’s share price rebound over the next 12 months? These analysts think the answer is ‘yes’!

BPs share price has plummeted over the last year. But City brokers think things are about to turn around, as…

Read more »

Investing Articles

Is this an unmissable opportunity to buy Nvidia stock?

Nvidia stock is down 33% from its peak, driven by tariffs and geopolitical pressures. Despite this, some investors may spy…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Dividend investors! Here’s what Warren Buffett says builds wealth in the stock market

Reinvesting dividends at yields of 8% or higher looks like a good way of building wealth. But Warren Buffett has…

Read more »