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Does The 25% Drop In Share Price Make Barclays Plc A Buy?

Grab a bite of BARC

I’ve been looking for an opportunity to get back into Barclays (LSE: BARC) (NYSE: BCS.US) for nearly two years, but with its share price rising sharply in that time, I thought I’d missed my chance. Suddenly, the stock is down 25% from its 12-month high of 338p. Right now, it trades at 251p. So what am I waiting for?

I’ve believed in the long-term investment case for Barclays from the moment it survived the financial crisis. There aren’t many stocks on the index that have been routinely described as too big to fail, but Barclays is one of them. I have also described it as ‘too big not to succeed’, because it is too big and clever and ugly to do anything else.

It is also frustratingly greedy and stupid. Barclays is desperately trying to mend its ways through Project Transform, but this is proving an expensive business. This massive cultural overhaul has cost £740 million so far, knocking Barclays’ Q3 pre-tax profits down 20% to £4.97 billion. That’s expensive PR. Let’s hope it works.

Corporate transformer

Barclays has now been caught up in a global investigation into the alleged manipulation of the global currency markets. I shudder to think how big any fine may be, given that this is a massive £3 trillion-a-day market. Its attempt to have a Libor test case thrown out ahead of next year’s expected trial have just been rejected by the Court of Appeal, which doesn’t help (I reckon the only market Barclays hasn’t been accused of rigging is Camden Market). It has also been forced into a £5.8 billion rights issue to plug a £13 billion capital shortfall, although at least it enjoyed a 95% take-up among shareholders. 

Chief executive Antony Jenkins has a lot more to do, as he looks to tidy up Barclay’s balance sheet, control spiralling costs and revive investment banking revenues, down £900 million in Q3. He recently cut 450 jobs at Barclays Wealth and plans to dump wealth management services in 130 countries.

The yield will return

Barclays may yield just 2.4%, but with 5.7 times cover, that can only rise. Earnings per share (EPS) is forecast to drop 25% in 2013, but 2013 is soon over, and 2014 looks a lot brighter. Forecast growth of 24% should take the yield to 4.1%, comfortably above the current FTSE 100 average of 3.5%, as the bank’s rehabilitation continues.

Barclays still has a long way to go, but that’s why you can buy it at just 7.9 times earnings. So is the recent share price fall an opportunity? If you want to buy and hold one of the FTSE 100’s key stocks for the long term, I reckon it is.

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> Harvey doesn't own shares in any company mentioned in this article.