In the last year, shares in Barclays (LSE: BARC) have slumped by 38% so saying they could now double in the next year may sound a little overly optimistic, especially while investor sentiment is so weak. One reason why its shares have fallen so heavily is the unpopular announcement that Barclays will be cutting dividends over the medium term. With the market having priced-in dividend rises rather than cuts, this was bound to irk shareholders and lead to a depressed share price.
However, the decision to reduce dividends could prove to be a sensible one. That’s because it should strengthen Barclays’ financial position and lead to increased stability and profitability further down the line. As well as a cut to dividends, Barclays also announced asset disposals and other strategy changes, which could begin to deliver improved financial performance in the coming months and years. And with investors tending to be a rather fickle bunch, it may not be too long before they begin to warm to Barclays’ new strategy and see that the bank could deliver strong results in future years. This has the capacity to push the bank’s share price higher in the next year.
Low valuation
A second reason why Barclays’ share price could double in a year is its valuation. While there are a number of cheap stocks in the FTSE 100 due to the index’s poor performance since the turn of the year, Barclays stands out even within a great value index. A key reason for that is Barclays’ price-to-earnings (P/E) ratio stands at just 10.1, which for a global bank that has the potential to deliver improved profitability, seems to be exceptionally low.
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Further evidence of Barclays’ upward rerating potential can be found when looking at its price-to-book (P/B) ratio. It stands at just 0.4 and while there’s a risk that there will be asset impairments in future, a 60% discount to net asset value is difficult to justify when the global economy continues to offer a bright long-term future. In fact, if Barclays’ share price was to double then the bank would still be trading at a discount to net asset value, which provides further evidence of just how cheap it is.
Growth on the horizon
A third reason why Barclays could double is that it has superb growth forecasts. While in the 2016 financial year the bank is expected to record a fall in its bottom line of 4%, next year it’s expected to fully reverse that decline by posting a rise in earnings of 41%.
This puts it on a price-to-earnings growth (PEG) ratio of just 0.25 and while there’s always scope for downgrades to guidance (as there is with any company), Barclays seems to offer a wide margin of safety. And with the market seemingly not having priced-in the expected rise in its profitability, now could be a great time to buy a slice of the company.
