2017 has seen another washout for investors in Barclays (LSE: BARC), and heaven knows they have had plenty of those lately. Its share price has fallen almost 20% in the last 12 months, and still trades 15% lower than it did five years ago. Hopes of a rebound have been continually frustrated, and investors have little dividend income to distract them either. Currently, it yields a meagre 1.52%.
Stress tested
Barclays is now the most unloved UK bank. Lloyds Banking Group and HSBC Holdings are both up around 5% this year, while Royal Bank of Scotland is up more than 25%. I wish I could say the market had got it wrong and the stock is misplaced, but there is a good reason for this. The latest Bank of England stress tests showed Barclays has the lowest margin for error among the big banks, trading at a price-to-book value of just 0.67%. This means that in the unlikely event that the bank was wound up, that is the return shareholders would get for each share they held. RBS’s book value is notably stronger at 0.9%, which rises to 1.22% with Lloyds and 1.33% with HSBC.
Throw in today’s underpowered dividend, which compares poorly to the 3.82% you get from Lloyds today (although you should get much more in future) and 5.46% from HSBC, and you can see why investors struggle to feel the love. Barclays may trade at an apparently bargain forward valuation of 12.5 times earnings but there is clearly a good reason for that. Global banking stocks may have rallied in 2017, Barclays hasn’t. Again, with reason. However, I have argued before that it could still make you brilliantly rich.
Future proof
Anyway, 2017 is almost over. I am looking to 2018 and beyond, and call me a foolhardy optimist but I believe things should start to get better for the bank from here. Its earnings per share have fallen in three out of the last five years, including a whopping 60% drop in 2013 and 22% drop last year. However, City analysts are predicting a brighter future, with a 21% rise across 2017, and an even juicier 29% rise in 2018.
Barclays is wriggling free of its legacy issues, albeit at a slower pace than investors hoped. It finalised its exit from Barclays Africa Group on 1 December, for example, which means most of the writedowns are now over and done with. It has appointed non-executive directors to the board of its new ring-fenced bank, Barclays Bank UK PLC, and can now start to sweat its more productive investment banking assets.
Cry freedom
A string of one-off charges, adjustments and writedowns have dragged on the bank’s profitability and this may continue for a while, but eventually it will break free. If 2018 isn’t the year, it will come in 2019, or 2020. Long-sighted investors may as well buy it now, before the brighter prospects are baked into a higher share price.
Today’s yield is covered a hefty 5.2 times, giving plenty of scope for progression. The income is forecast to hit 3.2% by 2018 and hopefully will kick on from them. If you plan to buy and hold Barclays forever, I would buy it today.
