Barclays (LSE: BARC) share price has crashed 52% over the last month. Since the bank released its annual figures, its share price has dropped even faster than the FTSE 100 itself.
Unfortunately for Barclays, this drop was straight after a decent set of financial figures for 2019. Turnover improved slightly, profits were up, and expenses were down. Moreover, shareholders were rewarded with a decent dividend.
So, is the bank a good buying opportunity for your new Stocks and Shares ISA allowance?
Barclays share price underwhelms
Barclays share price continues to be disappointing despite the solid results from 2019. Pre-tax profits improved 25% to £4.4bn. This seems fairly spectacular. However, much of this increase was due to cost-cutting and lower misconduct charges. Sadly, turnover has been pretty flat over the last five years, despite the small 2.3% increase for 2019.
This must be viewed in context though. Banks profits are tied to interest rates. The really low interest rates of recent times make it harder for banks to improve profit margins without taking more risk. And the crash of 2008 and 2009 demonstrated the consequences of the latter.
The government’s response to the coronavirus pandemic cuts interest rates further. Currently GBP LIBOR is 0.75%. This, when combined with distressed borrowers and an imminent recession, is putting more downward pressure on Barclays shares.
But I think investors must be realistic with expectations. It’s highly likely profitability will contract this year. And this will affect any reintroduction of Barclays’ dividend, cancelled at the Bank of England’s request.
A future scrip dividend?
Prior to the pandemic, Barclay’s 3.21% dividend yield was well-covered and relatively safe. However, Barclay’s uses a scrip dividend, so investors can choose payment in shares instead of cash. An advantage to shareholders is more shares without stamp duty or commissions. And Barclays don’t need to generate the cash to pay it.
However, the use of a scrip dividend also raises payout ratios and dividend per share figures. And it also adds capital to the balance sheet, effectively converting retained profits into share capital. A large scrip dividend can have a diluting effect on earnings per share because more shares are in circulation. This may adversely affect the share price. When comparing Barclays with other banks, this is something to bear in mind.
I think it’s possible that Barclays will reinstate their scrip as soon as they are able to. Banks will need to encourage investors but the upcoming economic recovery will require their cash.
According to the FPC, UK banks are well capitalised to withstand severe coronavirus disruption. It also stated it will take further action to underpin the banks if required. This bodes well for the future of the sector.
Some US analysts have given Barclay’s share price a target of 150p for 2020. Barclays is currently trading around 86p against a tangible net asset value of 335p. I think the latter could increase as banks lend recovery money to businesses and individuals.
With all this in mind, I think this FTSE 100 stock is attractive. I’ll be adding it to my Stocks and Shares ISA.
