Its been a frustrating year for investors in Barclays (LSE: BARC) (NYSE: BCS.US), with the banks share price falling by 16% since the turn of the year. Thats well behind the FTSE 100s gain of 1% over the same time period. However, after recently announcing the appointment of a new Chairman (with John McFarlane set to replace Sir David Walker in 2015), Barclays could be well worth buying for the following seven reasons.
Unlike many of its UK-listed banking peers, Barclays remained profitable throughout the credit crunch. Certainly, the bottom line has been much more volatile than it was pre-financial crisis, but the fact that the bank has been able to stay in the black during one of the worst banking crises in history should give investors confidence in its growth profile moving forward.
Like many of its peers, Barclays is changing the way it operates. This includes disposing of non-core assets in order to make the bank leaner, more efficient and, ultimately, more profitable. Indeed, Barclays seems to be shifting the risk/reward ratio more in its favour; selling off assets that require relatively large amounts of capital in return for disappointing returns. For the long term success of the bank, the strategy appears to be a highly prudent one.
Barclays earnings forecasts for the next two years are very attractive. It is expected to increase the bottom line by 28% in the current year and by 26% next year. Both of these growth rates are hugely impressive and well ahead of those of the wider market. They show that, while resilient, Barclays is also a top growth play, too.
An Improving UK Economy
While the Scottish referendum poses a potential short term risk, the long term future of the UK economy appears to be very bright. Low interest rates and quantitative easing seem to have made the impact that was hoped for and the UK economy is among the fastest growing of the developed nations right now. This means less bad loans and fewer write downs for Barclays; a continuation of which will help to boost profitability.
A Low Valuation
With the bank being in the midst of allegations regarding its Dark Pool trading system, sentiment in Barclays is at a low ebb. That equates to a superb buying opportunity, with shares in the bank trading a on a price to earnings (P/E) ratio of just 10.7. This is far less than the FTSE 100s P/E of 13.7 and shows there is scope for an upward rerating of Barclays shares.
With shares being so lowly priced, Barclays currently yields 3.1%. This is roughly in line with the wider index and is very impressive for a bank that is primarily focused on the UK. For example, Lloyds is due to pay its first dividend since the credit crunch this year, while RBS is set to resume dividend payments next year.
However, there is the potential for higher dividends in future. Thats because Barclays pays out just 33% of profit as a dividend, which seems rather low when Lloyds is aiming to pay out 65% of profit as a dividend in 2016. Even the 45% that Barclays is aiming for over the medium term could mean shares in the bank yield around 5.3% next year (assuming no change to the share price).
So, seven stunning reasons to buy Barclays. However, it’s not the only bank that could make a positive contribution to your portfolio. So, which others should you buy, and why?
A good place to start is our free and without obligation guide to the UK banking sector.
The guide is simple, straightforward and you don’t need to be a banking expert to put it to good use! It could help you to take advantage of a highly lucrative sector and make 2014 and beyond even better years for your portfolio.
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Peter Stephens owns shares of Barclays, RBS and Lloyds. 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.