It may be somewhat surprising to learn that shares in Barclays (LSE: BARC) (NYSE: BCS.US) have risen by 19% since the turn of the year. That’s 18% more than the FTSE 100 and is a surprise because news flow has been rather negative for the wider banking sector. For example, regulators continue to allege wrongdoing and the prospect of further fines for banks appears set to remain over the medium term. Furthermore, the Grexit situation is doing nothing to help investor sentiment, with the EU’s outlook better than it was but still rather downbeat.
Despite this, Barclays has been a great share to own in 2015. And, looking ahead, I believe it will be a superb performer in the long run for these three reasons.
Low Valuation
While the banking sector may continue to endure negative news flow, the fact of the matter is that we are no longer in a recession. The financial system is not about to melt down (even if Greece does leave the Euro) and the value of a bank’s asset base, such as Barclays, is not about to collapse. As such, there seems to be little reason for Barclays to have such a low valuation.
For example, it currently has a price to book (P/B) ratio of just 0.67. This means that its shares could rise by 50% and still trade at their net asset value which, for a bank offering the size, scale and profitability of Barclays, would still be very cheap.
Favourable Conditions
Although low interest rates are tough for savers, with cash balances generating a paltry return, a loose monetary policy is good news for Barclays. That’s because demand for new loans has increased, while the challenge of servicing existing loans has become much easier thanks to lower borrowing costs.
And, looking ahead, low interest rates are likely to remain in place for a number of years, with the Bank of England stating that a level of 3% looks could be realistic for the end of the decade. As such, Barclays should enjoy a favourable operating environment over the medium term, with its bottom line likely to react very positively.
Income Potential
When it comes to income stocks, Barclays looks set to be one of the most appealing on offer – but not for a couple of years. That’s because its 45% target payout ratio has not yet been achieved but, in the coming years, it is likely to be, as the bank improves its financial standing even further.
And, with Barclays set to deliver a net profit of 28.5p per share in 2016, a dividend of 12.8p per share seems very feasible. This would put Barclays on a forward yield of 4.7% and, with the scope for strong profit growth owing to the favourable trading conditions previously mentioned, dividends really could soar and push Barclays’ share price much, much higher.
