Making stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at Barclays (LSE: BARC) (NYSE: BCS.US), and listening to what the angel and the devil on my shoulders have to say about the company.
Climbing costs a concern
Barclays has undertaken a gargantuan restructuring scheme, known as Transform, to deliver a more efficient earnings machine after the 2008/2009 banking crisis underlined the bloated state of the group. Although this promises to improve the firm’s growth prospects, rising costs related to the scheme threaten to affect earnings in the meantime.
Indeed, last month’s interims revealed that £741m worth of costs related to the programme during July-September pushed group operating expenses £271m higher during the period, to £14.14bn. This in turn drove adjusted return on average shareholders’ equity to 7.1%, down from 9.7% during the corresponding 2012 period.
Strength across key divisions
Still, the savings programme was a must in order to deliver long-term earnings improvements, and Transform is certainly making excellent progress in achieving this. I also believe that the firm’s main divisions are in great shape to deliver strong revenues in coming years, while rising exposure to red-hot markets also bodes well for future expansion.
For instance, Barclays is making stunning progress in key emerging markets in Africa, and pre-tax profit from its Africa Retail Business Banking arm leapt 59% to £344m during the nine months to September. Barclaycard also continues to display solid momentum, with profits rising 2% to £1.17bn during the period.
And although current concerns over the timing of monetary tapering prompted Investment Bank profits to duck 12% to £2.85bn during January-September, rising client activity here is a great omen for future revenues.
Legal worries continue to hang
Barclays, like many within the UK banking sector, continues to attract accusations of illicit business practices that threaten to result in further heavy financial penalties in the courts. The company — having earmarked £3.95bn to cover the cost of mis-selling payment protection insurance (PPI) in previous years — is also currently being investigated for manipulating foreign currency markets.
Barclays has also shelled out hundreds of millions for rigging the Libor benchmark interest rate and, along with Deutsche Bank and UBS, late last week failed to remove claims of rate fixing from two major lawsuits. This setback could cause fines to balloon from claims related to the mis-selling of Libor-linked products.
Dividends primed to explode
Barclays is not currently a prime pick for income investors as the firm, hampered by fluctuating earnings in recent years, has been unable to offer above-average dividend yields. Indeed, for this year the bank currently offers a dividend yield of 2.5%, according to City projections, below the FTSE 100 forward average of 3.2% and corresponding reading of 3.6% for the wider banking sector.
However, analysts expect the bank’s progressive dividend policy to surge from next year, with Barclays expected to raise the full-year payout a colossal 64% to 10.6p per share, helped by a 22% earnings improvement. This payment currently represents a 4.1% yield, and I expect a backdrop of improving earnings to underpin further strong dividend growth in coming years.
An angelic share selection
Shares in Barclays have ducked markedly lower in recent weeks, and the bank currently trades on a lowly forward P/E rating of 10.5, just above the value watermark of 10. At these levels I believe the bank is a snip given its bubbly earnings and dividend prospects, and I expect the firm to overcome current travails — particularly in the courtroom — and punch solid long-term growth.
