If you purchased new shares in the recent £5.8bn Barclays (LSE: BARC) (NYSE: BCS.US) rights issue, you may be feeling pleased with yourself. Your shares are now worth 28p — or 11% — more than their ex-rights price.
Although shares don’t always rise following a rights issue, it’s not hard to see why they have done in this case. Given that it’s a profitable, dividend-paying, FTSE 100 company with good prospects, Barclays has an extremely undemanding valuation — frankly, it looks very cheap.
1. Book value bargain
The first thing to note is that the ex-rights price of 247p per share was below the bank’s tangible net asset value per share, which I estimate to be about 267p, based on the bank’s half-yearly report, which was published before the rights issue.
At their current share price of 275p, Barclays shares are almost 100% backed by tangible assets, and are considerably cheaper than the bank’s book value per share of 317p.
2. Cheap P/E
Analysts’ consensus forecasts suggest that the bank will report earnings per share of 26.3p this year, placing it on a 2013 forecast P/E of just 10.5. That compares pretty favourably to the FTSE 100 average forecast for the year ahead of 14.3.
In comparison, Britain’s two bailed-out banks — Lloyds Banking Group and Royal Bank of Scotland Group — trade on 2013 forecasts of 14.4 and 20.1 respectively, making Barclays look very cheap (and RBS look quite expensive).
3. Dividend growth
Until the financial crisis, banking stocks were a popular choice with income investors. The UK’s banks are desperately trying to recapture that status, in order to get back into favour with pension funds and other big investors.
Barclays managed to avoid cancelling its dividend, but its payout fell from 34p in 2008 to just 1p in 2009, before starting to recover. This year’s payout is expected to be 6.5p, while next year’s is expected to rise to 10.7p, giving a prospective yield of 3.9%, well above the FTSE 100 average of 3.0%.
Buy now while it’s cheap?
Barclays has had a lot of bad publicity this year, but the bank’s underlying business seems solid; reported profits doubled during the first half of this year, and bad debt charges fell by 5%. If the bank’s full-year results meet expectations, then I expect Barclays shares to perform well over the next six months.
