It’s easy to see why investors head for banking and financial services company Barclays (LSE: BARC) (NYSE: BCS.US) when they are hunting for an income stream. After all, at today’s share price of 210p, the forward dividend yield is running at about 5.2% for 2015 and City analysts expect underlying earnings to cover the payout around 2.7 times that year.
Yet many will be wary of the financial sector after the events of recent years and that’s a good thing. Indeed, if you look at Barclays’ share-price chart for the last four years, you’ll see the trend is down. That situation works against a successful dividend investment in my book.
What’s the point in collecting a growing stream of dividends if capital loss is working against your total investment return?
How is that dividend paid?
The thing to remember about dividends is the only thing that pays them is cash. If a company doesn’t have the cash, it can’t pay the dividend, so a company paying a dividend is showing that its cash flow cuts the mustard, right?
Wrong. Companies seem to pay dividends for all sorts of reasons, even if they don’t have enough cash coming in, and one thing that seems to challenge Barclays is its performance around cash:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
| Cash at bank (£m) | 81,483 | 97,630 | 106,894 | 86,191 | 45,687 |
| Net cash from operations (£m) | 41,844 | 18,686 | 29,079 | (13,823) | (25,174) |
| Net cash from investing (£m) | 11,888 | (5,627) | (1,912) | (7,097) | (22,645) |
| Net increase/decrease in cash (£m) | 49,831 | 17,060 | 18,273 | (27,873) | (41,711) |
I’m seeing a downwards trend on every cash measure, which seems to be a by-product of the firm’s efforts to turn its fortunes around. Barclays is engaged in a plan to de-risk its business for reputation and conduct, after a string of scandals, and to de-leverage from it teetering position of high financial gearing.
Reform doesn’t come cheap. It sucks out cash, and investors won’t forget last year’s £5.8 billion dilutive rights issue either. However, regulators won’t let Barclays carry on as before, and lower leverage implies scaled-back operations and thus lower profits.
Yet, the dividend is up
Despite the ructions in its business, Barclays keeps growing its dividend payment:
| 2009 | 2010 | 2011 | 2012 | 2013 | |
| Dividend per share | 2.31p | 5.09p | 5.56p | 6.5p | 6.5p |
Forward predictions indicate decent dividend growth for 2014 and 2015 too.
Yet all banking companies bolt directly to the cyclicality of the financial industry. We can see that cyclicality playing out now. As the macro-economic cycle unfolds Barclays’ profits seem to be on the rise, but the share price is slipping.
Playing the cyclicals is a difficult game. Viewing the cyclicals as a straightforward buy-and-hold-in-a-diversified-income-portfolio investment is a losers game. The losing might not arrive immediately, but in the fullness of time…
