Barclays (LSE: BARC) is another company that I have long held mixed feelings about. Now with Swiss authorities pursuing an investigation into the group’s precious metals trading practices, I’m going to highlight a very important issue that current and prospective Barclays investors need to be know about.
All seems well
Barclays’ adjusted figures for revenues, costs and earnings improved notably during 2014 and into the first half of the current year. This pushed the shares to the top of the UK banking league table, with losses contained at 1.5% for the year to date, which compares favourably against the remainder of the big four.
Consensus estimates suggest that earnings per share will be in the region of 22.4p for 2015, which gives Barclays with what seems like an undemanding price/earnings based valuation of 10.2x.
Dividends are also projected to remain steady at 6.5p, which would provide a yield of 2.7% at current prices.
With these points in mind, investors could probably be forgiven for thinking that all was well in the world for Barclays and that the threat of further fines during the coming year is not a materially important issue.
Tall tales
While management almost always has lots of positive numbers and developments that they are able to talk about come results day, what often emerges from the Barclays boardroom is little more than a selection of tall tales in my view.
This is because the numbers that management tend to talk about are almost always adjusted figures which, if viewed without the correct considerations in mind, can provide investors with a completely false view of the business’s true position.
Although there are plenty of reasons why investors and management can both find adjusted figures useful, I believe that the tradition of relying them allows management to sweep a lot of the bad news under the carpet.
A case in point would be the 2013 & 2014 performances, where Barclays declared adjusted earnings per share figures of 15.3 and 17.3p respectively.
Those investors who ignored the PowerPoint presentation, which is often the focus of most retail investors on results day, and went straight for the full announcement will no doubt understand the point that I am about to make here.
Reality bites
In fact, Barclays’ real earnings per share were actually 3.8p in 2013, with a per share loss in 2014 of 0.7p. In both periods, management paid out significantly more in dividends than they were able to earn from underlying operations.
There were two key drivers behind these poorer numbers in the income statement. First and foremost, cash charges arising from regulatory settlements wiped out a significant portion of earnings in both periods.
Secondly, in 2014, Barclays’ disadvantageous capital structure saw bondholders hoover up the remaining £845m of its earnings – and then some. This left ordinary shareholders facing total losses of £174 million for the period, which equated to a per share loss of 0.7p.
Neither of these points received much air time in the power-point results presentation, nor in the media.
Don’t believe the hype
First and foremost, if I were actually a Barclays shareholder, I would be inclined to completely disregard the words that management offer up in their annual presentation in favour of an exclusive focus on the financial statements and mandatory performance numbers
Secondly, despite a genuinely positive performance from Barclays in the first half, another full year loss cannot be ruled out for 2015 given that further provisions for future regulatory redress are now approaching £2 billion for the current year.
While there probably isn’t a lot that the current management will be able to do the stop the ongoing flow of litigation, in the absence of preventative action, I feel it is important investors understand that these conduct issues are damaging the business in more ways than one.
Value trap
Most notably, the mire that management have walked into in terms of their pledge to maintain the dividend after the 2013 rights issue means that the group will probably continue to pay out more in dividends than it earns from its underlying businesses for at least the foreseeable future, thereby depleting its reserves for the length of time that regulatory provisions remain an issue.
Such depletion will continue to erode the real equity value of the business and if not accompanied by a matching decline in the share price, will also ratchet up the valuation of the shares.
This means that any seemingly low P/E is not necessarily indicative of value. Rather, it places Barclays firmly inside “value trap” territory in my view. For that reason, I, for one, will be opting to observe price action from a safe distance as opposed to jumping into the fray on this occasion.
