Today I am looking at why I believe Barclays (LSE: BARC) (NYSE: BCS.US) is an excellent banking stock pick for intelligent investors.
Rights issue concerns looking overblown
In June the Prudential Regulatory Authority (PRA) came across a £12.8bn shortfall in Barclays’ capital reserves, defying the bank’s earlier assurances that it was due to hit regulatory targets by the middle of 2014 and shaking confidence in the company. The news subsequently forced the bank into a $5.8bn rights issue the following month as part of a wide-ranging plan to address the cash hole.
However, experts believe that the new share issuance will fail to significantly impact investors’ wallets. Broker Investec notes that “the capital raised will NOT be put to work so it will be earnings dilutive, yet after the June 2014 hurdle it becomes “surplus”, and Barclays (with PRA approval) is already committed to giving it back again in spades“.
Indeed, Barclays has pledged to compensate for the rights issue by its ratio target of 30% for 2015 to between 40% and 50% in 2014. Brokers projections thus expect a payout of 12p next year, up from 6.7p in 2013, with 2014’s payout carrying a meaty 4% yield compared with 2.2% for the current 12-month period.
Excellent divisional drivers bolster outlook
In my opinion, Barclays has access to significant earnings levers ready to deliver strong earnings expansion in coming years. The bank continues to witness surging momentum in its Barclays Capital investment arm, and reported a 7% increase in pre-tax profit to £2.39bn in January-June as client volumes increased. Its Barclaycard arm also continues to make hay, and adjusted profit before tax here also advanced 3% to £775m due to rising customer lending.
Barclays also saw pre-tax profit from its retail and business banking operations in Africa jump 16% in the first half of 2013, to £212m. Although this area represents a small part of the pie in terms of Barclays’ overall profits, the firm’s rapidly expanding exposure across 14 key emerging countries in Africa should provide critical in driving long-term revenues.
A cheap pick for explosive earnings potential
And City analysts expect Barclays’ stunning growth prospects to produce lucrative returns next year and beyond. Following an expected 16% earnings per share fall in 2013, to 29p, the bank is expected to report a chunky 22% turnaround in 2014 to 35p.
And I believe that the company is trading at excellent value levels given its exceptional snap-back story. Barclays currently carries a P/E rating of 10.5 and 8.6 for 2013 and 2014 correspondingly, encamped around and below the bargain benchmark of 10, while next year’s earnings recovery also results in a price to earnings to growth (PEG) readout of 0.9. Any figure below 1 is widely considered excellent value.
