The last handful of years have been tough for investors in bank shares.
Indeed, buyers of the shares before their lows of 2009 are still unlikely to be sitting on anything but a considerable loss, with the companies themselves improving dramatically but their shares prices still being someway off their 2007 peaks.
Furthermore, after a strong 2012, the banking sector was rather disappointing in 2013 and struggled to keep pace with the wider index. Weak sentiment for the sector seems to be persisting into 2014, leading many investors to vent their frustration at the sector.
However, bank shares could actually be a logical place to invest and may help you to retire early.
One reason for this is their dramatically improved profitability. For example, Barclays (LSE: BARC) (NYSE: BCS.US) is set to deliver pre-tax profit of £6.75 billion for 2013 – the highest for a number of years. Furthermore, this does not look set to be a one-off, as it is forecast to increase this to just under £9.4 billion over the next two years.
From this pot, Barclays looks set to pay a rather generous dividend. Shares already yield 2.4%, which — although below the FTSE 100 yield of 3.5% — is still a lot better than most of its sector peers can manage.
However, what’s interesting about Barclays is that it has the potential to pay out a far greater proportion of earnings per share as dividends per share. Indeed, it looks set to increase its payout ratio (the proportion of earnings paid out as dividends) from the current 27% to around 40% in 2015, when it is expected to yield 5.3%.
While 40% is more generous than 27%, it could be considerably more generous. A payout ratio of 65%, for instance, is being targeted at Lloyds. Were this to be replicated at Barclays (using 2015 earnings forecasts) it could mean that shares trade on a yield of 8.4%.
Of course, the share price would likely move higher in such a scenario so as to keep the yield at a more respectable level. It does, though, highlight the future potential of Barclays to offer not only an above average yield but to also provide the opportunity for shareholders to make capital gains (or reverse their losses) over the long run. This could mean a happier (and earlier) retirement.
