Why I’d shun Barclays for this 6%+ yielding FTSE 100 giant

Paul Summers takes a look at the latest set of figures from banking behemoth Barclays plc (LON:BARC).

| 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.

Shares in FTSE 100 constituent Barclays (LSE: BARC) are firmly in the red today as investors contemplate a not-insignificant fall in profit at the banking giant over the six months to the end of June. 

Thanks to litigation and conduct charges of £2bn, pre-tax profit came in at £1.66bn — 29% below the £2.34bn achieved in H1 2017. A £1.4bn settlement with the US Department of Justice made up the majority of the fines with the £400m returned as a result of Payment Protection Insurance (PPI) mis-selling another significant contributor

Had Barclays not sustained these hits, pre-tax profit would have been 20% higher at £3.7bn thanks to a 46% improvement in credit impairment charges, better economic forecasts in the US and a reduction in operating costs. Pre-tax profits rose 30% to £826m in the UK with another £2.71bn coming in from Barclays International.

Having achieved an overall return on tangible equity (RoTE) of 11.6% over the reporting period, the company’s performance so far in 2018 — according to CEO James “Jes” Staley — was indicative of a bankbeginning to demonstrate its true value and potential“. He went on to suggest that today’s numbers increased the likelihood of the company returning “a greater proportion” of profits to its owners going forward.

Ah yes, those juicy dividends. One of the biggest attractions of banking stocks for some time now has been the huge payouts being offered by most of the major players. Industry peers Lloyds Bank and HSBC, for example, are expected to yield 5.4% and 5.5% respectively this year.

Barclays, by comparison, looks set to return 6.5p per share, equating to ‘just’ 3.4% at the current stock price. That’s still not a bad return by most dividend-hunters’ standards but, for a stock in an industry where the threat of regulatory fines is unlikely to ever fully go away, I’m not sure that’s sufficiently enticing. The fact that the £33bn cap juggernaut escaped any “significant” charges in Q2 — the first in a long time — is positive but assuming that Barclays is in the clear for good would be a step too far. The potential impact of Brexit can’t be dismissed either.

So, while today’s numbers are encouraging, I still think there are better income opportunities elsewhere in the sector, even after taking into account Barclay’s seemingly bargain valuation of just 9 times forward earnings for the current year.

Better buy?

In addition to its main rivals, I think geographically diversified insurer and investment manager Legal and General (LSE: LGEN) is another decent alternative to Barclays.

Based on analyst expectations of 16.4p per share for the full year, the £16bn cap offers a monster 6.3% dividend yield. That’s among the highest in the FTSE 100 index. Since big payouts can often be a sign that a company is experiencing difficulties, it’s also pleasing to note that Legal’s looks secure, covered 1.7 times by profits.

Hikes to the dividend may have slowed in recent years but, with a 6.7% increase predicted in 2018, they’re hardly stagnant. Backed by a solid balance sheet, rises have also been far more consistent than over at Barclays.

Half-year figures are due next Thursday. While I doubt we’ll see a significant shift in the share price any time soon (the stock has been trading in the 250p-280p range for the last year), a price of just over 9 times earnings, reducing to 8.5 in 2019, looks seriously 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.

Paul Summers 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.

More on Investing Articles

Investing Articles

Here’s what dividend forecasts could do for the BP share price in the next three years

I can understand why the BP share price is low, as oil's increasingly seen as evil. But BP's a cash…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

This FTSE 100 Dividend Aristocrat is on sale now

Stephen Wright thinks Croda International’s impressive dividend record means it could be the best FTSE 100 stock to add to…

Read more »

Investing Articles

3 shares I’d buy for passive income if I was retiring early

Roland Head profiles three FTSE 350 dividend shares he’d like to buy for their passive income to support an early…

Read more »

Investing Articles

Here’s how many Aviva shares I’d need for £1,000 a year in passive income

Our writer has been buying shares of this FTSE 100 insurer, but how many would he need to aim for…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

1 incredible growth stock I can’t find on the FTSE 100

The FTSE 100 offers us a lot of interesting investment opportunities, but there's not much in the way of traditional…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With an £8K lump sum, I could create an annual second income worth £5,347

This Fool explains how a second income is achievable by using a lump sum, investing in stocks, and the magic…

Read more »

Investing Articles

Here’s what dividend forecasts could do for the BT share price in the next 3 years

With the BT share price down so low, the dividend looks very nice indeed. The company's debt is off-putting, though.…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

28% revenue growth per year and down over 20% in price! Should I invest in this niche FTSE 250 company?

Oliver says this FTSE 250 company has done an excellent job bringing auctioning into the modern world. Will he invest…

Read more »