2014 has been little short of a disaster for Barclays (LSE: BARC). The share price of the bank has fallen by 19%, its full-year forecasts have been downgraded and the company has been accused of fraud with regard to its dark pool trading operations. Still, it remains hugely profitable and now could be even more attractively priced. However, does it really represent the best investment opportunity in the banking sector right now?
One aspect of Barclays that is not often discussed is the vast income potential that is currently on offer. Indeed, Barclays is forecast to increase dividends per share by 8.5% in the current year and by a whopping 39% next year. This means that, while shares currently yield 3.2% (which, in itself, is only just behind the FTSE 100s yield of around 3.5%) they are expected to yield an impressive 4.5% next year.
Furthermore, Barclays seems to be able to pay out a much larger proportion of profit as a dividend. For example, it currently pays out just one-third of earnings to shareholders and with sector peer, Lloyds, promising 65% over the medium term, the potential for Barclays to become a very strong income stock is plain to see.
Despite this, Barclays continues to trade at what appears to be an unduly low share price. Certainly, the fraud allegations are likely to continue to dampen sentiment, but even a significant fine (if it does take place) appears to be priced in. For instance, Barclays trades on a price to book ratio of just 0.65, which means that investors can buy every 1 of net assets in the company for just 65p.
This may have been understandable when Barclays was writing down assets in vast swathes, but with the macroeconomic outlook improving, write-downs are unlikely to be as high moving forward. Therefore, the current share price appears to be pricing in a margin of safety that is simply too wide given present circumstances.
As mentioned, fraud allegations are clearly holding back shares in Barclays. However, the market appears to be more than adequately pricing in a negative scenario. While shareholders may be finding the present period frustrating, Barclays still has a hugely positive future. It may take some time to come good but, due to a mixture of high growth potential (due in part to improving macroeconomic conditions), improving income prospects and a super-low valuation, Barclays remains the pick of a very lucrative banking sector.
Of course, Barclays isn’t the only bank that could give your portfolio a boost. That’s why we’ve written a free and without obligation report into the UK banks that could help you take advantage of what may prove to be a hugely lucrative sector.
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Peter Stephens owns shares of Barclays 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.