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Why Co-Op Troubles Make Me Want To Buy Barclays PLC

As all Fools know, there are many sayings that should warn investors against buying shares in companies when their rivals are faltering.

For instance, the saying “there’s no smoke without fire” as well as the old ‘canary in the mine’ adage both suggest that problems with one company could highlight issues with sector peers, too.

Indeed, such sayings may appear to be highly relevant in the UK banking sector at the present time, with Co-Op bank going through a difficult period, being required to raise up to £1.5bn of capital to plug a ‘black hole’.

Furthermore, this capital raising comes at the same time as Barclays (LSE: BARC) (NYSE: BCS.US) has announced its very own £5.8bn rights issue. Its main aim is to shore up its balance sheet and meet capital ratios as required by the new regulator.

So, perhaps Barclays is in a similar situation as Co-Op? Surely investing in it is a disaster waiting to happen, given the current circumstances that Co-Op finds itself in?

In my view, this is not the case. Barclays is a completely different beast to Co-Op. Certainly, its balance sheet does need to be improved and the rights issue looks set to achieve this goal. However, Barclays is a bank that has been profitable throughout the credit crunch until this year, with it requiring no vast state-aid as peers such as RBS and HBOS did.

In addition, it looks as though the future could be very rewarding for shareholders in Barclays. The bank is aiming to pay out up to 40% – 50% of earnings as dividends in future years. With the market currently forecasting earnings of 36p per share in 2014, this would equate to a yield of over 5% at the current share price.

Indeed, with the regulator being hot on capital ratios and balance sheet strength, it could be argued that the 40%-50% payout ratio of Barclays makes more sense than Lloyds’ 70% payout ratio, simply because it could leave the bank in better shape in the long run.

Furthermore, shares in Barclays are still cheap. They currently trade on a forward price-to-earnings (P/E) ratio of 10.3, which compares favourably to the FTSE 100 and to the wider banking sector. They trade on P/Es of 15 and 16.7 respectively.

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> Peter owns shares in Barclays.