Improving Asset Base
Over the last few years, Barclays (LSE: BARC) (NYSE: BCS.US) has vastly improved its asset base. This has meant splitting its operations into core and non-core, with it focusing more on its retail banking division as it seeks to wean itself off its past dependency of impressive, while volatile, investment banking and trading division profits. As such, Barclays now has a more appealing risk/reward profile, with its balance sheet set to become smaller, more efficient and, in the long run, more profitable.
Certainly, the shrinking of Barclays operations has meant a large number of redundancies and uncertainty for its investors. However, in the long run it is likely to create a more straightforward business that could see investor sentiment improve.
Clearly, a more appealing asset base is likely to be helpful for Barclays future growth prospects. As such, the banks growth potential is very strong and the rise of the UK economy is helping to push its forecasts for the next couple of years even higher.
For example, Barclays is now expected to increase its bottom line by 36% in the current year, followed by a rise of 21% next year. This means that its net profit is due to be 65% higher in 2016 than it was in 2014 and, when you consider that Barclays remained profitable throughout the credit crunch (and so is not starting from a low base of earnings), the potential looks even more impressive. This could be enough on its own to stimulate investor demand for the banks shares, with few FTSE 100 companies able to compete in terms of growth potential over the next two years.
Of course, rising profits also tend to mean increasing dividends. And, over the next two years Barclays is expected to increase the level of shareholder payouts from 6.5p per share in 2014 to 10.7p per share in 2016. Thats a rise of 65% and puts Barclays on a forward yield of 4.1%. And, with the Bank of England this week stating that it expects interest rates to remain very low for the next few years, such an impressive dividend yield is likely to make Barclays a relatively appealing stock especially if inflation does pick up and investors become more concerned about a rising income in real terms.
Despite all of the above, Barclays continues to trade on a very low valuation. For example, it has a price to earnings (P/E) ratio of just 11.2 and this provides tremendous scope for an upward rerating while the FTSE 100 has a P/E ratio of 16. Certainly, the current allegations of wrongdoing regarding forex rigging and Libor manipulation are likely to hold the banks shares back over the short run and, if there are more fines, then Barclays share price is likely to come under pressure. However, for long term investors they create an ideal opportunity to buy in at a super-low price for the prospect of significant price appreciation in the coming years.
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Peter Stephens owns shares of Barclays.The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.