Barclays (LSE: BARC) shares are on a roll, and about time too. So is this the start of a meaningful recovery, or just another false dawn?
The Barclays share price is up 40.28% in the last year. Most of the excitement came recently, with the stock soaring 54.96% in the last six months. On the FTSE 100, only Rolls-Royce Holdings and Antofagasta did better over that period (and then only just).
If I’d invested £10k in Barclays shares at the start of that run, I’d have a thumping £15,496 today, with dividends on top. So much for hindsight. All that matters is what happens next.
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There’s a school of thought that suggests the big UK banks will never regain their lost mantle. Up to a point, I subscribe to it. They’ve had to operate under far tighter regulatory guidelines since almost sinking the global economy.
Most have withdrawn from risky but more potentially rewarding investment banking activities, but not Barclays, which continues to serve corporate, government, and institutional clients worldwide.
Which may partly explain why it’s outperformed Lloyds Banking Group (a stock that, unlike Barclays, I do hold). Lloyds’ shares are up just 22.24% over one year, and 27.77% over six months.
That’s good, but it’s not good enough for CEO CS Venkatakrishnan, who has been under pressure to improve the bank’s profitability and valuation. He responded with plans to strip out £2bn of costs over the next three years. That always cheers investors, and the trick appears to have worked yet again.
Barclays weathered a tricky first quarter, which saw income fall 4% to £7bn as investment banking activity fell, savers sought better returns on their cash deposits, and the volatile housing market hit lower mortgage demand.
Top UK bank stock?
As with every bank, margins will be squeezed when central bankers finally start cutting interest rates. Offsetting that, mortgage demand should pick up, along with economic activity generally, while debt impairments should fall. Barclays’ sizeable US credit card business will hopefully continue to do nicely throughout.
Barclays still looks cheap, trading at a book value of just 0.5 (a figure of 1 is seen as fair). Its forward price-to-earnings ratio is just 7.06, well below the FTSE 100 average of 12.5 times.
I prefer to buy shares before they go on a six-month blockbuster run rather than afterwards. At the start of the recovery, Barclays yielded around 5% to 6%. Now it’s forecast to yield just 3.93% in 2024, albeit rising to 4.28% in 2025. By contrast, Lloyds is forecast to yield 5.9% in 2024 and 6.4% in 2025.
Barclays investors won’t be complaining, with shareholder distributions expected to total £10bn by 2026, including generous share buybacks. Ultimately, much rests with the investment banking arm, which offers the excitement many investors crave but faces intense competition in the US. That’s a problem many at Lloyds and NatWest Group would like to have, I suspect.
If I had cash in my trading account, I’d happily buy Barclays shares today. I don’t expect them to grow another 55% in the next six months. But taking a longer-term view, I believe the recent recovery is only the start.
