2016 has been yet another difficult year for investors in Barclays (LSE: BARC) so far, with the banks share price tumbling by 12% since the turn of the year. Clearly, the wider market fall of 5% during the same time period has impacted negatively on the banks valuation, but yet again Barclays is lagging the index. In fact, during the last five years the FTSE 100 has beaten Barclays by a whopping 37%.
Of course, Barclays is now at the beginning of a new era under a new CEO and management team. While the focus in previous years had been on developing Barclays retail banking operation as it sought to move away from the perceived higher risk investment banking space, Barclays now looks set to roll back the years and become more focused on investment banking. This strategy could boost the banks profitability and improve investor sentiment, which has been weak for a number of years.
Notablesuccesses
That said, Barclays strategy in recent years has been highly successful. For example, in 2014 it posted a rise in earnings of 13% and its expected to back this up with profit growth of 24% in 2015 and 21% in 2016. Despite this and despite the UK and global economies having brighter prospects than in previous years, investors cantget excited about Barclays or the wider UK banking sector. For example, Barclays trades on a price-to-earnings (P/E) ratio of only 8.9, which is considerably lower than the FTSE 100s P/E ratio of around 13.
In terms of its asset base, there was arguably less for Barclays to do than many of its peers in terms of the disposal of non-core assets after the Credit Crunch. Certainly, theres work to do in terms of making the bank more efficient and more focused in areas where it has a competitive advantage. Furthermore, regulatory challenges have also held back investor sentiment in recent years, with allegations of wrongdoing having the potential for fines thatmay have caused the market to downgrade Barclays valuation.
Looking ahead, further downgrades cantbe ruled out in the short run. Thats despite Barclays doing all the right things in terms of becoming increasingly efficient, growing its profitability and delivering a rising income to its investors. On this latter front, Barclays is expected to grow shareholder payouts by 26% in 2016 and this puts it on a yield of 4.3% for the current year, despite it being expected to pay out just 32% of net profit as a dividend.
In the longer term, such dividend growth will be most welcome especially with UK interest rates unlikely to move higher at a rapid rate. As such, a share price of 300p is very achievable over the medium term since it would equate to a P/E ratio of only 11.6 using the current years forecasts. However, in the short run 150p cantbe ruled out due to the scope for continued falls in the wider market. For long-term investors though, Barclays remains one of the most enticing buys in the FTSE 350.
Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.