In the aftermath of the financial crisis,you would never havethought of Barclays (LSE: BARC) (NYSE: BCS.US), Lloyds and Royal Bank of Scotlandas dividend investments. In fact nothing would have been further from investors minds.
After all, most of the banks were heavily loss-making, and had to conserve as muchmoney as they could to stay solvent.
Growing profitability
Yet today the banks are profitable again, and generating enough cash to be able to pay steadily rising dividends. In particular, Barclays has strong appeal as a dividend investment.
This company is cheap. The P/E ratio is 10.6, falling to 8.8 in 2015. The dividend yield is 2.8%, rising to 3.7%, and the dividend cover is currently 4.4. Whats more, the trajectory is very positive, with profitability set to push ahead over the next few years.
Barclays has three main parts to its business: retail banking, Barclaycard and investment banking. Retail banking is progressing well, benefitting from a recovering economy and a resurgent housing market. Barclaycard is also performing well, buoyed by the improving consumer economy. Barclaycard will be an integral part of the rapid growth in contactless and smartphone payments.
But still some concerns
In contrast, investment banking profits have disappointed, as stock markets and commodity markets have fallen. I am confident that the investment bank will recover eventually, when stock markets resume their upward trend, but this will take several years.
In terms of overall profitability, bad debts are falling, and capital ratios are improving, but the main downside is the fines and legal payments due to PPI, Libor-rigging and exchange rate-rigging. Neil Woodford talked about fine inflation, and although I am more positive, I think he had a point. Investors need toget a handleon the level of these fines in the next few years.
Foolish summary
Bank shares can be volatile, but I see my holding in Barclays as a long-term play on the recovery of financials. My caveat is thatthis notan investmentwhere I expect to see overnight results, and thecompany still facesmany headwinds. Nonetheless, there isthe prospect of capital growth,combined witha dividend yield which is increasing year-on-year, as Barclays confidence grows. Thats why Barclays is myperfect dividend investment.
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Prabhat Sakyaowns shares in Barclays, Lloyds and Royal Bank of Scotland. 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.
