Forecasting what will happen to the Barclays (LSE: BARC) share price in just five years might seem like a mug’s game.
But, if I buy some for the long term, I must believe they’re undervalued, right?
So, I’m just going to try a few scenarios and see where they might lead us. But first, a look at what happened in the past five years…
Same again?
There’s an old thought that we can forecast the weather fairly well by just saying tomorrow will be like today.
And the way bank shares have spent so many years going nowhere, it’s starting to sound like it might be true here too.
In the past five years, Barclays shares have lost 15%. So the same again would mean a share price of 119p (from 140p as I write). And that’s no good at all.
No, it’s better
But I think, the return can beat that, if the dividend keeps up. Forecasts put it at 8p per share (and rising, but I’ll stick with 8p here).
That would add 40p in five years, and each 140p we invest could be worth 159p (with the 15% share price drop). Not great.
But what if I buy more shares with my dividends each year, and then get more dividends from my new shares? Well, I work out that could take me to around 165p. That looks a bit better.
Now, what if the dividend rises in line with forecasts? I have to extrapolate (or guess) a bit. But I reckon that might take me to around 174p.
Earnings growth
Now, what happens if earnings should rise as predicted, we don’t get the same share price drop as the past five years, and the price-to-earnings (P/E) valuation of Barclays shares remains the same?
That has to be reasonble, doesn’t it? I mean the P/E ratio is down at just 4.9 right now. Can it really get lower?
Forecasts show earnings rising 20% in the next two years. Let’s be conservative and say 30% over five years.
That could add an extra 42p to the share price, taking us to over 210p including dividends. It would mean a five-year return of 50%. I’ve had a lot worse than that.
Price recovery
Now, that P/E of under five can’t last, can it? I hope it could double, but I’ll be cautious again and guess at an overall rise to eight. That would imply another 63% on top of the share price.
I’d be looking at doubling my cash in the next five years.
Will anything like this really happen? Well, that’s the tricky part. If you’d asked me five years ago, I’d have made the same kind of guess — and been badly wrong.
Long-term value
With inflation, interest rates, and the economy causing so much pain, the banks could suffer for some time yet.
So please take my guesses here as just a bit of fun, and put no faith in them at all.
But, they do make me think Barclays shares could earn some great long-term returns.
