Today I am looking at why I believe Barclays (LSE: BARC) (NYSE: BCS.US) remains a dicey dividend candidate.
Bank forecast to get dividends rolling again
Although the turmoil of the 2008/2009 banking crisis has resulted in persistent earnings pressure at British banking goliath Barclays, the firm has pulled out all the stops to blast dividends skywards again.
Payouts have risen at a compound annual growth rate of 29.5% since then, but more recently growth has stalled as the effect of a constrained bottom line has forced Barclays to put the kibosh on its progressive policy. Indeed, a 56% earnings collapse in 2013 — the third dip into the red in five years — prompted the business to keep the total payment on hold at 6.5p per share.
But City analysts expect Barclays to get its expansive payout policy back on track in the face of a resplendent return to earnings growth. A full-year dividend of 6.65p is currently pencilled in for 2014, up 2.3% from last year and supported by a 22% earnings rise. And a 32% earnings improvement next year is anticipated to push the payout 43% higher to 9.5p.
… but payout growth far from a foregone conclusion
However, I believe that question marks reign over the reality of these projections given the huge problems that the bank still faces.
The bank was relieved at the weekend to hear that it passed the European Central Bank’s stress tests, in the process emerging as Britain’s second-best capitalised bank behind HSBC. Barclays came in with a common tier equity 1 (CET1) rating of 7.1%, beating the ECB target of 5.5%.
But Barclays still has to face the Bank of England’s more stringent assessments in mid-December, and assume that property prices will collapse by 35% compared with the European scenario of 20%. Barclays continues to bet big on the UK mortgage market, resulting in its lowest ever loan rates introduced last week.
On top of this, Barclays also faces a multitude of legal battles which could smash earnings and with it current dividend forecasts. Indeed, the bank announced today that it was setting aside an additional £500m to cover the potential cost of foreign exchange market manipulation, as well as an extra £170m for the mis-selling of payment protection insurance (PPI).
With PPI, and interest rate hedging product claimants, continuing to emerge from the woodwork, and accusations of other wrongdoing still to be resolved — such as the alleged favouritism given to high-frequency traders at its ‘dark pool’ trading platform — the final bill for these wrongdoings remains anyone’s guess.
Barclays today announced plans to pay a 1p per share interim dividend for July-September, in turn keeping dividends in the year to date at 3p and matching the payout rate seen during the corresponding 2013 period.
And given the issues discussed above, I believe that investors should be braced for another year of full-year zero dividend growth in 2014.
