The last three months have been hugely disappointing for investors in Barclays (LSE: BARC) (NYSE: BCS.US). Shares in the bank have fallen by 8%, while the FTSE 100 is down 1% over the same period. Furthermore, allegations of wrongdoing surrounding the banks dark pool trading systems are likely to dampen market sentiment somewhat over the short term. However, for longer-term investors, there could be a lot of light at the end of the tunnel. Heres why.
A Low Valuation
Partly due to its recent share price fall, Barclays is hugely cheap right now. For example, it trades on a price to earnings (P/E) ratio of just 10.4, which is considerably lower than the FTSE 100s P/E of 13.8. In addition, Barclays has a price to book ratio of just 0.67, which means that investors are able to buy 1 of the banks net assets for just 0.67. While a price to book ratio of 0.67 was perhaps to be expected at a time when Barclays was writing down many of its loans and other assets, now that the macroeconomic outlook is much-improved, a ratio that low appears to point to great value for investors in Barclays.
As well as the scope for an upwards rerating of the banks valuation, capital gains could also come from strong growth prospects. For example, Barclays is all set to increase earnings per share (EPS) by 25% next year, which could be the catalyst for share price growth. Indeed, when such impressive growth prospects are combined with a relatively low P/E, it equates to a price to earnings growth (PEG) ratio of just 0.3, which is hugely attractive.
Complementing Barclays earnings growth potential are dividend forecasts that should mean shares in the bank start to appeal to income-seeking investors. For example, while the bank currently yields a rather average 3.1%, it is forecast to increase dividends per share by 39% next year so that shares in Barclays could yield as much as 4.4% in 2015. Furthermore, the bank is committed to increasing its dividend payout ratio over the medium term, so shareholders could see their income further boosted over the next few years.
As well as a low valuation, impressive earnings growth prospects and attractive income potential, another reason to buy Barclays is weak sentiment. While it may seem as though Barclays goes from one problem to the next, this is unlikely to last forever and, in fact, the bank is making great progress with its strategy of becoming leaner and more profitable. As a result, sentiment is unlikely to remain at a low ebb indefinitely, which means that now (while sentiment is weak) could prove to be a great time for long term investors to buy a slice of Barclays.
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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.