UK inflation remained stuck at 8.7% in May, sending twitches through bank stocks again. Barclays (LSE: BARC) shares dipped a little. The share price has lost all its modest gains of 2022.
The mini spike early in 2023 didn’t last, and investors are dumping banks again.
Best buy?
The bears seem to be doubling down on pessimism.
And that, to me, shows something fundamentally contrarian about UK investing culture. Contrarian to common sense, that is.
It’s obvious that we should buy shares when they’re down, isn’t it? But so many people do just the opposite.
They buy bank shares when they’re booming and everyone is cheering them on. And they dump them when the mood turns sour.
Banks are tops
I see reasons why bank stocks could be the ones to buy in 2023, and why Barclays might be the best of the bunch.
The latest dividend news from investor services firm AJ Bell suggests this year could turn out to be a cash bonanza.
Which sector looks set to head the charge? You guessed it, the banks. Forecasts predict FTSE 100 banks will pay out a total of £14.6bn this year, setting a new record.
That’s just a forecast and it might not happen. But it’s way higher than the previous record of £13.3bn set in 2007. And that was before the great banking crisis of 2008.
Where can these dividends come from? A full 55% of forecast FTSE 100 profit growth is expected to come from just the Financial sector this year.
Low valuation
How does Barclays square up in valuation terms? Well, the City folk expect it to chip in to the sector’s bumper dividend harvest with a 4.7% yield of its own.
That’s not the biggest, with Lloyds Banking Group on an expected 5.3% yield. Lloyds almost made it as my top FTSE 100 pick of the year except for one thing, which I’ll come back to.
The Barclays dividend should be covered more than three times by forecast earnings. And analysts expect it to grow strongly in the next two years too.
What price-to-earnings (P/E) ratio would we need to stump up for, to buy Barclays shares today? Less than five, and falling, which seems almost criminally cheap to me.
What could go wrong?
Before I get too excited, plenty could still go wrong. As inflation shows, the economy is in a mess. And it could stay messy for a lot longer than I might expect.
When people, and businesses, don’t have the cash to do what they want, that can put pressure on the demand for banking services.
I also want to keep a close eye on any bad debt provisions the banks will need to make this year. Cash set aside for those is cash that can’t be paid in dividends.
In the long term, though, I see Barclays as possibly the UK’s strongest bank. For me, it has the edge over Lloyds due to its international business in the US. Barclays is just not such a big hostage to the UK economy and to mortgage pain.
