How Will Barclays PLC Fare In 2014?

Should I invest in Barclays PLC (LON: BARC) for 2014 and beyond?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.

That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.

To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:

  • Prospects;
  • Risks;
  • Valuation.

Today, I’m looking at banking company Barclays (LSE: BARC) (NYSE: BCS.US).

Track record

With the shares at 260p, the firm’s market cap. is £41,830 million.

This table summarises Barclays’ recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue (£m) 21,436 29,954 32,204 33,033 25,609
Net cash from operations (£m) 33,192 41,844 18,686 29,079 (13,667)
Adjusted earnings per share 47.6p 22.32p 28.15p 25.65p 31.95p
Dividend per share 10.65p 2.31p 5.09p 5.56p 6.02p

1) Prospects

It’s clear from the table that the business of banking is highly cyclical and I think that knowledge should frame any investment decision relating to the sector.

So, from an investment point of view, what tends to happen to cyclical shares as the economic cycle unfolds? For a start, the P/E multiple is likely to expand and contract counter-cyclically to earnings. So that means when earnings are high, like in 2008, the P/E ratio will likely be low as the market attempts to anticipate shrinking earnings ahead. Conversely, when earnings are low, like in 2009, the P/E multiple will likely be high as the market attempts to anticipate growing earnings ahead.

Similarly, the dividend yield will probably be at its highest when earnings peak, and at its lowest when earnings reach a nadir.

As we move through economic cycles, the P/E rating of the cyclical companies often gradually down-rates accordingly. Right now earnings and dividend payments at Barclays are recovering, so I’d expect the P/E rating to reduce gradually and the dividend yield to increase steadily. That process is going to drag on the share price.

This all means that investing in the cyclicals, like Barclays, requires a different approach to ‘normal’. You need to turn your reading of traditional value indicators on its head. When the P/E rating is low and the yield is high – when the value looks most attractive on well-know measures – it’s often a good idea to sell the shares to avoid an imminent plunge in the share price. When the P/E is high and the dividend yield low, the shares are worth researching with a view to buying.

So, within that framework, where are we now with Barclays? It’s hard to tell, of course, but relating the share price to net asset values can be informative. When economic cycles are peaking, banking shares tend to be selling above net asset values. When the cycle is down, banking shares can be selling at a discount to net asset values. In the recent interim management statement, Barclays declared an adjusted net tangible asset value of 323p per share, which means the current 260p share price is showing a 19% discount.

With restructuring and cost control measures in full swing, it seems likely that Barclays will further recover to close that net asset valuation gap, despite all the bad news currently swirling around the industry.

2) Risks

Banking shares tend to be early movers in macro-economic recoveries. That means there’s a risk that the big annual share-price movements have finished for banking shares in this cycle. Macro-economic news is becoming increasingly good. We are heading towards the next cyclical peak and banking shares will start to adjust to accommodate peak earnings again, as I’ve described above, although that earnings peak could yet be years away.

As far as I’m concerned, there’s another big risk involved in bank investing: there is not a hope on this earth that I’ll ever really know what’s going on in the bank’s business until after it has happened. By then it’s too late from an investment perspective. Banks are definitely outside my circle of investing competence. My suspicion is that many other private investors will feel similarly after trying hard to analyse the prospects of public limited banking companies.

3) Valuation

City analysts following Barclays expect forward earnings to cover the dividend about 2.8 times in 2014. At today’s share price the forward P/E rating is 8.5 and the dividend yield 4.2%. Remember, it’s best to read these traditional value indicators differently for cyclical companies.

The shares are currently trading around 81% of the firm’s adjusted tangible net asset value.

What now?

To me, banks like Barclays are less attractive than they were a few years ago, around 2009.

I think there’s still mileage in investing in Barclays, but banks can be such complex beasts to analyse that it’s hard to ensure that we are buying good value.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Kevin does not hold shares in Barclays.

More on Investing Articles

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how to invest £180 per week in an ISA to target a £9,343 second income

By investing less than a couple of hundred pounds each week into an ISA, this writer thinks he could build…

Read more »

Investing Articles

Here’s how I’d invest £200 per month to target a passive income of over £7,100!

Christopher Ruane walks through the mechanics of putting a couple of hundred pounds each month into shares to earn passive…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

£9,000 in an ISA? Here’s how I’d aim to turn it into a £10,207 annual second income

Our writer highlights a high-quality ETF that he thinks could help lay a solid foundation for a sizeable future second…

Read more »

Buffett at the BRK AGM
Investing Articles

With a spare £30 a week, I’d use the Warren Buffett approach to building serious passive income!

By learning some lessons from billionaire investor Warren Buffett, this writer aims to build passive income streams using modest regular…

Read more »

Investing Articles

If I’d invested £10k in the FTSE 100 25 years ago, here’s what I’d have today

Has the FTSE 100 been a winner over the last 25 years? Muhammad Cheema takes a look at this and…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying just 9 or 10 shares

Our writer explains why he believes careful selection of not that many quality blue-chip shares could help him aim for…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

£7,000 in savings? Here’s how I’d aim for almost £2,000 a month in passive income

With only a few thousand in savings and £100 to invest a month, our writer considers a strategy to aim…

Read more »

Investing Articles

4 great purebred UK shares that don’t rely on the US economy

UK stocks or American shares? Despite fantastic performance from US markets in recent years, the answer may not be as…

Read more »