Potential 51% Gain Means Now Is The Right Time To Buy Barclays PLC

Several key ingredients make Barclays PLC (LON:BARC) a strong buy, explains Roland Head.

| 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.

BarclaysBarclays (LSE: BARC) (NYSE: BCS.US) shares got a boost last Friday, when the bank announced that the current chairman of Aviva, John McFarlane, will be Barclays’ next chairman.

Mr McFarlane’s achievements at Aviva, where he kick-started a turnaround that has seen the insurer’s share price rise by 60% in eighteen months, suggests to me that he might be the right person to sort out Barclays’ lingering issues.

However, Mr McFarlane’s appointment alone is not enough to make Barclays a buy: the numbers need to be right, too.

Valuation

Let’s start with the basics: how is Barclays valued against its past earnings, and the market’s expectations of future earnings?

P/E ratio

Current value

P/E using 5-year average adjusted earnings per share

15.6

2-year average forecast P/E

9.5

Source: Company reports, consensus forecasts

The last couple of years have been poor for Barclays, pushing up its five-year average P/E to 15.6.

However, analysts’ forecasts for 2014 and 2015 suggest that the bank’s earnings may return to more normal levels — and that Barclays’ shares look quite cheap at today’s prices.

What about the fundamentals?

Is Barclays cheap for a reason? The company’s has performed poorly on key fundamental measures over the last five years:

Metric

5-year compound average growth rate

Total income

-0.9%

Pre-tax profit

-9.3%

Dividend

+21%

Return on equity

-30%

Source: Company reports

The apparent dividend growth is skewed by the fact that Barclays cut its dividend from 10.6p in 2008, to just 2.3p in 2009 — so while last year’s payout of 6.5p is a considerable improvement on the 2009 payout, it remains nearly 40% lower than the 2008 dividend.

51% upside?

However, there are another set of numbers I believe investors should consider before buying Barclays shares.

Barclays’ shares continue to trade at a significant discount to their book value, which when combined with a rising dividend yield, is a key attraction, in my view:

Barclays

Value

Price/book value

0.7

Price/tangible book value

0.82

2014 prospective yield

3.1%

2015 prospective yield

4.3%

These numbers tell me an attractive story: not only can I buy Barclays’ assets for less than their tangible value, but I will be paid a reasonable yield while I wait for the market to regain its trust in Barclays’ balance sheet.

If Barclays’ shares were valued at 1.25 times their tangible asset value, like Lloyds Banking Group or HSBC Holdings, Barclays share price could rise to 348p — 51% higher than today’s price of 229p.

Of course, the obvious risk here is that Barclays’ assets will turn out to be worth less than the bank believes, so the book value will fall. However, while asset impairments have been a big feature of banks’ accounting over the last five years, I believe this risk is diminishing.

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.

Roland Head owns shares in Barclays, HSBC Holdings and Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged black male working at home desk
Investing Articles

Here’s how I’m trying to build up my ISA to earn £10,000 passive income each year

I've been working to build some passive income for my retirement for years. Here's how I'm using the stock market…

Read more »

Elevated view over city of London skyline
Investing Articles

Could this 5.8%-yielding FTSE 250 share storm back in 2025?

Christopher Ruane weighs some pros and cons of a FTSE 250 share he owns that has had a rough few…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Kier Starmer aims to make the UK an AI superpower! 2 FTSE stocks are poised to benefit

This pair of FTSE stocks look set to benefit long term as the UK government plans to tap into the…

Read more »

British Pennies on a Pound Note
Investing Articles

Was this penny stock a silly purchase?

This penny stock has fallen in value by over half in the past five years. Here our writer explains why…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

After a stunning 2024, could IAG shares still go higher from here?

Christopher Ruane explains why he sees some grounds for optimism that IAG shares could move even higher -- and whether…

Read more »

Investing Articles

Searching for passive income? Here are 2 top dividend growth shares to consider!

These FTSE 100 and FTSE 250 dividend shares are tipped to lift dividends over the next two to three years,…

Read more »

Investing Articles

Should I buy 29,761 shares in this FTSE 250 dividend REIT for £1,000 a year in passive income?

Stephen Wright's wondering whether it's a good idea to buy shares in a FTSE 250 REIT with a highly reliable…

Read more »

Dividend Shares

A 12.65% yield? Here’s the dividend forecast for this FTSE income share

Jon Smith talks through the2026/27 dividend forecast for an income stock that already has a double-digit yield but could go…

Read more »