Suffice to say, shares in Barclays (LSE: BARC) (NYSE: BSC) have disappointed in the last year. That’s because, while the FTSE 100 has risen by 7%, Barclays is up just 4%. And, it’s a similar story since the credit crunch, with Barclays consistently underperforming the wider index, while many of its banking peers have seen their share prices soar. However, looking ahead, it may finally be Barclays’ turn to shine, with its shares very capable of adding over 80% to their current valuation.
Growth Potential
While Barclays’ bottom line is still being hurt by PPI provisions and regulatory fines, it is still expected to rise at a rapid rate over the next couple of years. In fact, while the FTSE 100’s growth rate continues to be stuck in the mid to high single digits, Barclays is due to post gains of 43% and 19% respectively in each of the next two years. That’s a stunning rate of growth that is unlikely to be matched by any of its major UK-listed peers.
Valuation
Despite such strong growth prospects, Barclays trades on a forward price to earnings (P/E) ratio of just 10.2. That’s significantly lower than the FTSE 100’s P/E ratio of around 16 and, in fact, if Barclays were to deliver on its growth potential and trade on the same rating as the wider index, its shares would be priced at just over 470p. That would represent a gain of 87% from Barclays’ current share price of 253p and, while it may take time to reach that level, shares in Barclays have been there before back in 2008.
Dividend Yield
While a share price of 470p may sound somewhat optimistic at first, looking at Barclays’ dividend prospects highlights just how achievable it is. That’s because the bank is expecting to pay out around 45% of net profit as a dividend over the medium term which, in itself, is a rather modest payout ratio and allows for sufficient reinvestment in the business.
Looking at next year’s forecast earnings per share figure of 29.5p, and assuming this level of profitability were to remain over the medium term, a 45% payout ratio would equate to a dividend per share of 13.3p. At a share price of 470p, this would give a dividend yield of 2.8%, which is only slightly lower than Barclays’ present dividend yield of 3.3%. And, with there being the potential for further earnings growth beyond 2016, a share price of 470p really does start to make sense.
Looking Ahead
Clearly, the upcoming General Election could cause Barclays’ share price to come under pressure in the short run. However, for longer term investors now appears to be a great time to buy shares in the bank, with its low valuation and stunning growth prospects having the potential to push its shares back to the same level at which they were trading seven years ago and, in the process, delivering an 80%+ capital gain.
