In the past year, Barclays (LSE: BARC) shareholders have been through a torrid time. The bank appeared to be recovering nicely from the crisis, but in August 2015, Barclays shares started to turn tail again — since 31 July last year, we’ve seen a 43% fall to 161p!

The bank’s announcement that it was to slash its 2016 dividend by more than 50%, after reporting a fall in full-year profits for 2015, didn’t help. It took many people by surprise, including me, who had been seeing Barclays shares as a great recovery prospect prior to that. 

The bank also said that it still expects to “pay out a significant proportion of earnings in dividends to shareholders over time“, although it looks like were going to be stuck with yields of under 2% for at least a couple of years.

The bigger picture

But before we start thinking things can only get worse and we should dump Barclays shares, let’s take a wider look at the company.

The 3p dividend that Barclays intends to pay this year looks a bit paltry, especially when rivals, like Lloyds Banking Group, are ramping up their annual payments. But it would be covered more than five times by forecast earnings per share. So why such a big cut?

Barclays has a new chief executive now, in the person of Jes Staley, who took the helm on 1 December. And when a new boss comes in, that’s the perfect time to make tough decisions and get away with it. There’s restructuring going on, there’s cash that needs to be saved, and you can pare expenses to the bone when you’re the new boy and everyone will blame the need for it on the performance of your predecessors.

I don’t mean that cynically either. I’d much rather see Barclays taking a longer-term view of its overall finances and targeting the kind of stability that should hopefully lead to decades of profits for its shareholders, than focusing on short term issues like this year’s dividend. Such a retrenchment is often the right thing to do, but the short-term focus of the investment institutions and the opprobrium that can be heaped upon a boss’s head can make that kind of decision even harder for an incumbent.

A new boss, on the other hand, has more freedom to do the right things.

Undervalued by half?

Current forecasts are going to come with a significant margin of error right now, but if they’re close then Barclays shares would drop to a P/E of only around 7.5 based on a 2017 prediction of a 40% rise in EPS. And that’s got to be way too cheap. In fact, it’s only a bit above half the long-term FTSE 100 average of a little over 14, and we’re talking about a strong and strengthening bank here and not a company that’s on its last legs.

To recover from the recent price slump, Barclays shares are going to have to put on 80% from today’s price, so is such a near-doubling feasible? An 80% rise would bring the P/E back up to 13.5, which is still below the index average, and if Barclays really has solid long-term prospects with a high likelihood of being back to paying good dividends within just a few years, then I’d say Barclays shares surely have the potential to at least double.

The short-term future is very much uncertain, so it probably won’t happen in the next 12 months — but I see a 100% gain as a fair target for the medium term. The City’s analysts have Barclays as a solid ‘buy’, and I’m with them.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.