Barclays plc isn’t the only bargain bank stock I’d buy today

G A Chester explains why he’s bullish on Barclays plc (LON:BARC) and an often-overlooked mid-cap bank.

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I’ve been writing about Barclays (LSE: BARC) as an undervalued stock for a good few years now. At this stage, it’s fair to say I’m a jaded, but not yet disillusioned, bull. I still can’t help seeing the bank as a bargain buy that could deliver superior returns over the long term.

With hindsight, it was perhaps too much to expect its shares to embark on a resolute upward trajectory as early as five years after the financial crisis. That’s even though this was a bank that had avoided the ignominy of a government bailout, albeit through some wheeling and dealing that has ultimately led to charges by the Serious Fraud Office. Indeed, Barclays still has more than its share of legacy misconduct issues to resolve.

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Nevertheless, the way I see it, the group continues to possess valuable franchises, the underlying businesses aren’t performing badly at all and above all else the stock simply looks too cheap to ignore.

Bargain basement valuation

Currently trading at 189p, Barclays shares are almost 20% below the 233p paid by Jes Staley when he bought £6.5m worth almost two years ago as the incoming chief executive. More fundamentally, they’re 33% below the bank’s last reported tangible net asset value of 284p.

City consensus underlying earnings forecasts are 17.5p a share this year, followed by 22.2p next year, representing earnings growth of 37% and 27%. These give a price-to-earnings (P/E) ratio of 10.8, falling to a complete bargain basement 8.5, and a price-to-earnings growth (PEG) ratio of 0.3 for both years, which is deeply on the value side of the PEG fair-value marker of one. It’s just too cheap to ignore, I tell you!

Good for customers and shareholders

While many investors are focused on either the recovery potential of the FTSE 100 banking giants or the exciting growth prospects of new challenger banks like Aldermore and Metro, a FTSE 250 bank that has been quietly going about its business since 1878 is often overlooked.

Close Brothers (LSE: CBG), which released its annual results today, is a leading UK merchant banking group providing lending, deposit-taking, wealth management services and securities trading. Built on those rather old-fashioned concepts of integrity, client relationships and prudent financial management, Close Brothers’ long-established business model has been good for customers and, as a result, for shareholders.

Attractive opportunity

In today’s results, the board lifted the 2017 dividend by 5% to 60p. The payout was 12p back in 1997 and in the 20 years since — which of course includes the 2008/9 financial crisis — the dividend has never been cut. The latest uplift came on the back of increased profits across all its divisions. Group operating profit increased 13% but net profit and earnings per share (131.7p) rose a more modest 3%, due to the government’s new banking surcharge which effectively adds 8% to the corporation tax bill of banks.

However, a 6% drop in the shares to 1,430p has more to do with the company saying that competition in some areas, such as motor and asset finance, is leading it at this stage of the cycle to focus on underwriting discipline rather than growth. This is eminently prudent in my view and I see the fall in the share price, which puts the bank on a trailing P/E of 10.9 and dividend yield of 4.2%, as an attractive opportunity to buy a slice of this distinguished business for the long term.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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