Concerns over the health of Britain’s economy has driven Barclays‘s (LSE:BARC) share price through the floor. An argument could now be made that the banking giant is now one of the FTSE 100‘s most attractively valued income shares.
City analysts think earnings will edge 1% lower in 2023. This leaves the company trading on a price-to-earnings (P/E) ratio of 4.6 times, far below the Footsie forward average of 12 times.
The number crunchers expect dividends to continue soaring, too, despite its uncertain trading outlook. This means Barclays shares also offer a prospective dividend yield of 6.2%, a reading that sails above the 4% average for FTSE 100 stocks.
And things get even better on this front for 2024 and 2025. Yields for these years soar to 7% and 8.1% respectively.
Solid forecasts
Of course dividends are never guaranteed, and a sharp fall in profits could play havoc with the bank’s payout record. But based on current earnings forecasts, these estimates look pretty solid.
Last year’s full-year reward of 7.25p per share is expected to rise to 8.55p per share in 2023. Payouts are then tipped to increase to 9.75p next year and to 11.2p in 2025.
Pleasingly, these projections are well covered by anticipated earnings through this period. Dividend cover sits at between 3.3 times and 3.6 times, comfortably above the widely regarded minimum safety benchmark of 2 times.
Barclays’ strong balance sheet gives added strength to near-term dividend projections. Its CET1 capital ratio stood at 14% as of September. This robust figure also sits at the top end of the bank’s 13% to 14% target.
NIM problems
Based on these figures, Barclays shares may look like a slam-dunk buy. Yet I’m not tempted to buy the FTSE 100 company today. I think its share price could continue to plummet as conditions get tougher.
For one, its net interest margin (or NIM) is coming under increasing pressure. This is a key measure of the bank’s performance, and is the difference between the interest it pays to savers and what it charges borrowers.
Last month Barclays cut its NIM forecasts for 2023, to 3.05% to 3.1% from a range of 3.15% to 3.2%. Deposits are falling, in part because customers are shopping around for a better deal. Meanwhile, the previous boost provided by Bank of England interest rate hikes.
Why I’d avoid Barclays shares
Last month’s NIM revision wasn’t the first downward cut in 2023. And it may not be the last. But this isn’t the bank’s only problem.
Impairments are also soaring, and in the third quarter Barclays booked another £381m worth, up 14% year on year. The bank is being battered by rising credit card debt in the US, and could remain under pressure in 2024 due to weak growth on both sides of the Atlantic.
I like Barclays because of its exposure to North America, while its investment bank is another attractive feature. These could give it the edge over other UK banks like Lloyds.
But the problems it faces in the near term are severe. And over a longer time horizon, profits will come under pressure as competition from challenger and digital banks mounts.
On balance, I’d rather search the FTSE for other cheap dividend shares to buy.
