A cheap FTSE 100 dividend growth stock that I’d buy today and hold for the next 20 years

This unloved stock could be a FTSE 100 (INDEXFTSE: UKX) bargain, says Roland Head.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Around half of all divorces take place during the first 10 years of marriage, according to UK government statistics. So making a commitment to hold on to something for 20 years is clearly a big deal.

Many investors would claim that it’s not realistic to decide to hold a share for the next 20 years. I don’t agree — I think it’s realistic enough, if you ignore short-term noise and stay focused on the bigger picture.

There are certainly some stocks I’d be happy to buy today and commit to holding for 20 years. Today I want to talk about one of my top picks for long-term buyers.

329 years can’t be wrong

20 years is little more than a heartbeat for Barclays (LSE: BARC), the FTSE 100 bank that’s been in business since 1690 — that’s 329 years.

It’s true that the Barclays share price has been a dismal performer recently, falling by 40% over the last four years. But I think this short-term weakness could give long-term investors an opportunity to buy at a bargain price.

Analysts’ forecasts, which exclude certain one-off items, suggest the bank will generate an after-tax profit of £3,652m this year, or about 21.7p per share. That puts the stock on 7.2 times forecast earnings.

Shareholders should see significant dividend growth too. Forecasts suggest the payout will rise from 6.5p per share to 8.7p per share in 2019. That’s a forecast dividend yield of 5.5%, at current prices.

Last but not least, the bank’s stock trades at a 40% discount to its tangible net asset value of 275p per share. I see that as an attractive margin of safety.

Why isn’t the price higher?

Good question. There are still various problems with banks. Ultra-low interest rates and competitive mortgage markets mean that it’s harder to make money from lending than it used to be.

Banks still aren’t very profitable — last year, Barclays generated a return on tangible equity of just 3.6%. However, when costs relating to misconduct charges were stripped out, this figure rose to 8.5%. Indications so far are that a return of more than 9% is likely in 2019.

What about PPI?

The PPI claims deadline in August means that costs relating to this compensation programme will now tail off. However Barclays, like most rivals, experienced a massive last-minute surge in compensation claims in the final weeks of the month.

Although the bank had already set aside £9.6bn for compensation, it now expects to need a further £1.2bn-£1.6bn.

Given this, you might wonder why Barclays’ share price has been rising recently. I think the secret to understanding this is to remember that markets hate uncertainty. It’s not the first time that we’ve seen bank share price rises following a major settlement.

Why I’d buy

I suspect banks will eventually find ways to boost their profit margins, despite low or even negative interest rates.

The end of PPI should also boost the amount of spare cash available for shareholder returns.

Barclays is unloved by investors, but I think it’s in much better health than 10 years ago. That’s why I think now could be a good time to be buying BARC shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »